Debts & Loans

Banks are encouraging the over-use of unregulated debt management plans to keep bad debts off their balance sheets and failing to give proper debt advice, insolvency practitioners are warning.

Amid predictions of record personal bankrupcies this year, banks are hiding much of the potential damage they are facing, according to industry sources.

Stephen Lightley, chief executive of Invocas, which specialises in Protected Trust Deeds, Scotland's version of the Individual Voluntary Arrangements (IVAs) which offer a structured alternative to bankruptcy, said: "There is no requirement for provisions to be made for debt management cases. The debts are apparently performing, but the financial substance of the debt is exactly the same. It is a trend that is growing."
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A rash of companies sell debt management plans as offering a reduction in debt with a "single affordable monthly repayment". The company negotiates with creditors, but any freeze on interest or charges by a creditor will cost 15% to 17.5% of a monthly repayment.

Citizens Advice warns that converting an unsecured loan to a secured loan puts homes at risk, and the typical reduction in monthly payments means the repayment term could be extended into decades.



Lightley added: "Debt management plans are a huge problem. If you talk about dams breaking, the first dam has broken and people who are financially distressed have moved towards the second dam, debt management, and are now heading beyond that. These plans typically blow up within 18 months, so what we are going to see over the next 12 months is a big increase in formal insolvencies as lenders realise they are no solution."

The insolvency practi- tioners' body R3 says debt management plans are "unregulated and un- recorded" but it estimates there are 600,000 out there - around four times the total of IVAs and bankruptcies for 2008.



Graham Rumney, chief executive of R3, said: "While DMPs can be a good option for individuals who have manageable levels of debt, we have seen evidence of them lasting up to 10 years, and heard of some stretching to 70 years. It may be in the bank's interest to steer personal debtors into debt-management plans as they are retained as performing assets on the balance sheet, but it will not always be in the debtor's interest."

Rumney says that while the government has called for the banking code to be expanded in the light of the recession, the code "refers to debt management plans but completely ignores a reference to the official statutory procedures of bankruptcy and IVAs, which are the government's own debt solutions".

He added: "Insolvency practitioners expect to see personal insolvencies increase by over 20% year-on- year from 2007 to 2009 so now really is the time to provide clear guidance."