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Debt Advice Handbook 14th edition

2. The general approach to non-priority debts

• When debts may need to be treated differently
• Debt management plans

If the suggested strategy is to be accepted by creditors, it is important that it is based on a consistent set of criteria, and that all creditors are treated alike. Treating all creditors alike does not mean that a particular creditor should not be challenged if, for instance, the debt is unenforceable, or the creditor is adopting unacceptable lending or debt collection practices. The credit industry is competitive and individuals within it are likely to reject any strategy that appears to favour another creditor. The strength of your negotiating position lies in your ability to present a strategy that is empirically based and business like. All offers to creditors must therefore be made on the same basis, using the same criteria when making choices with regard to their debts.

Where appropriate, creditors may need reminding of their obligations under the relevant industry code of practice (eg, to treat cases of financial difficulty sympathetically and positively) and under the Financial Conduct Authority’s (FCA’s) Consumer Credit Sourcebook – eg, not to pressurise clients to make payments they cannot afford, to sell property or to increase their borrowing. Also, creditors should treat clients in default or arrears fairly and with forbearance and due consideration (such as considering freezing interest or charges, deferring payment of arrears or accepting token payments for a reasonable period), and should not unreasonably require that all arrears are paid in one payment, or in unduly large amounts, and/or within an unreasonable period.1FCA Handbook, CONC 7.3.2G, 7.3.10R(3), 7.3.4R and 7.3.10R(1)-(2)

 

1     FCA Handbook, CONC 7.3.2G, 7.3.10R(3), 7.3.4R and 7.3.10R(1)-(2) »

When debts may need to be treated differently

If a debt which is strictly a non-priority debt has a special importance to the client, there may need to be an exception to the general principle. Note: if there is any possibility of the client becoming bankrupt or applying for a debt relief order in the foreseeable future, you should advise her/him about the implications of preferring such debts (see here). Debts that may need to be treated differently include the following.

•Debts created by a loan from a familyor community member, or an employer. These may, on strict legal criteria, be no different from money owed to a finance company. However, if failure to repay this debt will lead to serious financial or personal problems elsewhere in the family (eg, if a loan has been taken out to consolidate the client’s non-priority debts which is secured on a family member’s home) or at work (eg, dismissal), it may be necessary to give it priority over other non-priority debts. Details need to be included in the client’s financial statement as expenditure and other creditors must be told of the position. However, if the client subsequently chooses an insolvency option, such as bankruptcy, there could be repercussions as such payments are likely to be regarded as ’preferences’ (see here).
•Unsecured debts that have been guaranteed (see here). These may need to be given priority in order to protect the guarantor, particularly if s/he is a family member. The payments need to be dealt with in the same way as above and are subject to the same potential repercussions.
•Debts to mail order catalogues. These may be essential to someone on a low income as a way of budgeting for essentials such as household items and clothing, provided a low balance is maintained.
•Bill paying services (also known as budgeting accounts), perhaps through a credit union or a commercial lender. The client makes monthly payments to the credit union or lender, who in turn pays various agreed household bills on the client’s behalf. These bills are likely to be for essential expenditure in terms of including them on the client’s financial statement and, if they fall into arrears, will then be priority debts. It may, therefore, be in everyone’s best interests to maintain these payments if this means there is more money available for other non-priority creditors.
•A debt incurred through the fraud of the client or her/his partner or a relative, where s/he could face prosecution if the debt is not paid.
•Debts that do not fit into the usual debt advice process. These are known as ’square peg’ debts because they do not fit neatly into the priority/non-priority categories and include credit union loans (see here), mortgage shortfalls (see here) and traffic penalties (see here).1See C Wright, ‘Square Peg Debts’, Adviser 172
•Debts to ’loan sharks’. This expression tends to refer to illegal moneylenders who make loans at extortionate rates and enforce payment through violence or threats of violence. Once involved with a loan shark, people often find themselves permanently in debt, with late payment resulting in substantial penalties being added to the debt. As well as not being authorised by the FCA (see here), loan sharks are often involved in other criminality and sometimes coerce their victims into committing criminal offences as a way of repaying their debts.

Clients rarely admit to being indebted to a loan shark and often use money intended for essential expenditure in order to make their repayments. They may even claim that money is being used to repay a ‘family friend’.

If you discover that a client is a loan shark victim, it is likely the client will be reluctant to report the matter, fearing for her/his own safety or that of her/his family. As ever, the decision about the next step is the client’s but it should be an informed one. You could refer the client to the Illegal Money Lending Team (tel: 0300 555 2222 in England or 0300 123 3311 in Wales). These can offer the client support and arrange to meet her/him at a safe venue (in your presence, if necessary) to discuss what remedies are available, what action can be taken and the protection that can be provided.2See also P Richardson, ‘Help Us Stop Loan Sharks Now’, Adviser 141

 

1     See C Wright, ‘Square Peg Debts’, Adviser 172 »

2     See also P Richardson, ‘Help Us Stop Loan Sharks Now’, Adviser 141 »

Debt management plans

A debt management plan is an informal arrangement, under which the client agrees to repay her/his creditors. The term is usually used to describe an arrangement made on the client’s behalf by a third party who also manages the plan. The arrangement normally involves an equitable distribution of the client’s available income after priority payments have been made (see here). The client makes a single regular payment (usually monthly) to the third party, who may be:

•a debt management company, which negotiates the debt management plan, collects the payments from the client and distributes them to the creditors in return for a fee paid by the client (often referred to as ’fee chargers’); or
•StepChange or PayPlan, both of which can arrange a debt management plan and distribute the payments to the client’s creditors, but do not charge the client a fee. They are paid by the creditors through deducting a percentage of the money recovered (known as ’fair-share’ arrangements). For this reason, they are part of the free money advice sector. Both have minimum criteria for setting up a plan (eg, relating to the amount of available income) and can also help clients set up individual voluntary arrangements (see here).

If a client’s agreed strategy is to make pro rata payments to her/his creditors (see here), a debt management plan under which s/he only has to make one monthly payment, instead of a number of individual payments, may be in the client’s best interests.

Note: some debt management companies do not deal with emergencies and/or priority debts. You must therefore assist the client to deal with these before s/he can be referred for a debt management plan.

The Consumer Credit Sourcebook requires debt management companies to signpost clients to the Money and Pensions Service’s website for information about free-to-client debt advice services and to refer clients to a provider of free-to-client debt advice if the client has issues requiring urgent attention which the debt management company is either unable or unwilling to deal with.1FCA Handbook, CONC 8.2.4R and 8.3.7(3)

Debt management companies fall within the Financial Ombudsman Service’s jurisdiction. If a client is dissatisfied with the service provided, s/he should consider making a complaint.

 

1     FCA Handbook, CONC 8.2.4R and 8.3.7(3) »