In March 2016 another debt management firm, Compass Debt Counsellors went into administration. For its clients the best case is that they have the hassle of finding another DMP provider. But many will have lost hundreds or thousands of pounds, where Compass was holding some of their money and hadn’t yet paid it to the creditors. There is a discussion here where several Compass clients are describing what they have probably lost – they are unlikely to get any of this money back.
If you want a debt management plan (DMP) how can you avoid this sort of problem? These sorts of DMP company failures have only happened with fee charging companies, so one easy option is to avoid these and go for a free DMP firm. Or you could set up and run your own DMP so you don’t have to trust a firm with your money at all.
All fee charging DMP firms are currently under “interim authorisation” and being assessed by the Financial Conduct Authority (FCA).
UPDATE 10 March 2016 The FCA has refused authorisation to PDHL and is currently writing to its 16,000 customers: “In considering PDHL’s application for authorisation, the FCA found evidence that the firm offered poor quality debt advice and uncovered a number of failings“.
UPDATE May 2016 It is expected that the several commercial DMPs firms are going to be closing as they have been told that they will not be authorised.
But if you assume that authorised firms aren’t going to go under and lose your money, there will remain the question of whether it is better to use a fee-charging firm or a free one.
I’ve been talking to a few people about why some people choose to pay fees. The issue reminds me of listening to Brits and Americans discuss health care – both sides have very strongly held views! I thought it would be interesting to use this as a comparison. So:
Do you get a better service if you pay fees?
For healthcare you may well get a nicer surroundings: smarter waiting room, private room in hospital, better food etc. But is the actual medical side any better?
Sometimes you can “jump the queue” by going private, getting an operation or other treatment faster. The equivalent for a DMP would be having your debts paid off sooner. But if you are paying fees for a DMP, less of your monthly payments are going to your creditors, so a fee paying DMP takes longer than one from a free DMP company.
The only way that a fee charging DMP could finish sooner than a free one is if the fee charging company was better at getting interest frozen on your debts. I haven’t seen any evidence to suggest this is the case. Most creditors do agree to freeze interest in a DMP whether you are managing it yourself or whatever company is running the plan for you.
You may sometimes get extra treatment options if you go private with a health problem. In contrast, with debts you are likely to get a wider choice of alternative debt solutions if you go to a free firm – for example you could have a Debt Relief Order set up. Very few commercial firms will help with DROs because they wouldn’t make any money out of them.
What about the success rate? This is a hard question to answer for DMPs. There aren’t any statistics published for DMPs – you can’t even find out how many are set up by a firm each year, let alone how many finish! It’s not even clear what statistics would be helpful, see How many DMPs succeed and how many fail?
When doctors and surgeons are asked about their “success rates”, these can be hard to measure because some doctors take on the harder cases where you would expect less good outcomes. The same applies for DMPs. You will see a much higher percentage of clients with benefits problems and priority debts in a free DMP firm than in a commercial one. That doesn’t mean the free firms are less good at handling easy DMPs, it just means commercial companies don’t want to touch difficult cases.
Worries about free services
Some people in debt choose a fee-charging DMP firm because they are suspicious about free services, suggesting various possible problems. To people working in the free sector – as I am – these perceptions seem misguided and often simply wrong. But it would be a mistake to ignore them. If that is what people feel, then explanations need to be given and the free sector needs to consider how it presents itself and its DMPs.
- “its better to speak to expert professionals not volunteers”
This is a misunderstanding – the two biggest free DMP providers, StepChange and Payplan don’t have any volunteers at all, so speak to them and you are always dealing with professionals.
- “free DMP companies are funded by the banks”
Most free DMP companies get most of their income from “fair share” arrangements which are paid by the creditors. But this doesn’t make a difference to what you would pay each month. And it doesn’t it affect the advice you are given. The commercial companies don’t let you pay less each month, they have to put forward the same monthly offer that a free DMP would – otherwise the creditors would refuse to freeze interest.
- “Someone I pay will work in my best interest”
So you would rather trust a fee charger that gets a lot of their business by buying names from cold-callers and whose staff may get commission from signing you up for a DMP than a charity that will advise you if you have better options than a DMP and can help you with those? Which firm is really working in your best interest and which just wants your money?
- “free isn’t possible, there must be hidden charges”
Simply wrong – there aren’t any hidden charges, the free services are funded in other ways.
- “free sounds like a scam”
The only scams in the DMP world come from the dodgy end of the fee chargers, which as the recent news about Compass shows. Hopefully the FCA is going to weed out the cowboys.
- “if you are paying someone, they will be on your side and not be judgmental”
Wrong. Well hopefully the commercial firms are on your side, but so are the free DMP firms!
- “I want my information kept completely confidential”
Of course – and that is exactly how it will be handled by a free DMP firm. All DMP firms, free or charging, supply creditors with a summary of your income & expenditure – if they don’t the creditors won’t accept your monthly payment and freeze interest. But apart from this, the free DMP companies are not going to tell the tax man, the DWP, your creditors, your employer, your partner or anyone else anything about your affairs.
- “a commercial firm will deal with everything; with a free one you get some help but you still have to do the work”
Another misunderstanding – a free DMP works in exactly the same way as one you pay for: the DMP firm deals with your creditors and you just make one monthly payment to the DMP firm.
Most people don’t make an active choice
Most people can’t name one debt management firm, and very few will be able to name two or more. People are usually choosing a DMP firm at a point in their lives when they are under pressure from creditors and feeling very stressed. Unsurprisingly, most sign up to the first firm they come across that promises to make their financial pain stop, to halt the letters and phone calls from creditors and worries about court and bailiffs..
Some creditors will signpost to one of the free firms. Other peoples will ask friends or come across advertising. And the commercial firms spend more on advertising than the free DMP firms.
To suggest that many people “choose” a particular DMP firm doesn’t seem accurate – the word “choice” suggests that there were at least two alternatives and there was a reason to go with one of them, not that they signed up with the first firm they talked to without considering anything else.
Who should YOU choose?
Most people are happy with their choice of DMP firm and often are very grateful to it for helping them out of their debt problems. “I don’t care if I could have got it cheaper, it has worked well for me” is a pretty common reaction.
But if you are about to choose a DMP firm, or if you have to change DMP firms because your old firm is being closed down, then why wouldn’t you go for a free one, where your DMP will finish sooner?
There are no advantages to paying fees and no downsides to free… So I suggest:
- look at how DMPs compare to the alternatives;
- thinking about whether you would prefer to run your own DMP – it could be easier than you imagine;
- looking at my list of good places for debt advice and then talking to one of them about a DMP.