Debt experts’ warning over rising bankruptcy costs

By Simon Gompertz Personal finance correspondent, BBC News

The rise in the cost of going bankrupt could discourage people with financial problems from seeking a solution, debt experts are warning.

The fee for petitioning for bankruptcy rose by £75 to £525 at the start of the month. With the court fee added on, the total upfront cost is £700.

The Insolvency Service said the increase was needed to cover the cost of administration.

The charges, including court fees, have gone up by 37% since March last year.

Insolvency practitioner Mark Sands, from RSM Tenon, has warned that the increase would put extra pressure on individuals who were likely to be under stress or depressed.

“So many people flounder around and do not see a way out,” he said.

“They are going to be put off exploring bankruptcy as a solution.”

Squeeze

The £525 charge is a deposit to cover the cost of managing a bankruptcy, which allows the bankrupt person to throw off the burden of debt and make a fresh start.

The Insolvency Service recovers a full administration fee of £1,715, less the deposit, from the bankrupt’s assets or surplus income at a later stage. This sum is not being increased.

Forms of insolvency

• Bankruptcy: The traditional way of escaping overwhelming debt. Ends after one year, but you are likely to lose all your assets including your house to pay something to the creditors
• Individual voluntary arrangement (IVA): A deal between you and your creditors, overseen by an insolvency practitioner. Less stigma, less chance of losing your home, but involves paying some of your debts in one go or over a number of years
• Debt Relief Orders: Introduced in April 2009, these allow consumers with debts of less than £15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy

“The fee is staying the same but we are increasing the proportion of that fee which we get on day one,” said the deputy head of the Insolvency Service, Graham Horne.

The Insolvency Service has seen its income squeezed because of the falling value of homes and other assets which are recovered from bankrupts.

Currently, the £1,715 fee is never fully paid in half of bankruptcies.

There has been some criticism of the rising cost.

“It is unfair to families who are struggling but I felt that any money I had was going to be taken anyway,” said a recent bankrupt who spoke to BBC News,

Jon Elwes, from the Money Advice Trust, said: “This increase in the cost of going bankrupt is likely to swell the numbers of people falling through the net of the current insolvency regime.

“Our advisers at National Debtline speak to people everyday for whom bankruptcy would be the best solution to their debt problem, but for the fact they cannot afford the associated fees.”

Lower cost

There is now a cheaper and easier alternative, the Debt Relief Order (DRO), which costs £90.

An increasing number of people who are in financial trouble and looking to escape their debts have been avoiding bankruptcy and taking this lower cost route.

In the first quarter of this year there were 6,788 DROs, a 20% rise on the previous year.

However, people can only ask for a DRO if their debts are less than £15,000 and savings and assets are less than £300.

“What if you have £16,000 of debt?”, said Mark Sands of RSM Tenon.

“You are faced with that barrier of hundreds of pounds before you can opt for bankruptcy to resolve your difficulties.”

Una Farrell, from the Consumer Credit Counselling Service, said: “It is a very steep rise. We already have to do a lot of work helping our clients to get the money together to pay the fees.”

But Mr Horne said the Insolvency Service was obliged by Parliament to break even, a task which had become increasingly difficult.

“It has always been our policy that if bankrupts can pay something towards their debts then they should,” he said.

“We have to strike a balance between giving bankrupts debt relief and a fresh start, and the need to provide some return to creditors.”

The fees chargeable by most bailiffs are legally regulated in various Statutory Instruments, but this varies between the different types of debt that he is to collect. Sadly, many bailiffs are charging fees that are either not permitted by law, or are very excessive. The Government is currently looking at introducing far stricter regulations of Bailiffs and has issued a Consultation Document to various organisations that include the following statement…

“Enforcement Agent law is very complex and confusing, and comes from a number of sources in both statutory and common law. The regulation of the enforcement profession is currently fragmented, with some individuals operating outside of any structures and evidence of threats and intimidation being used against vulnerable people in their own homes. The enforcement agent fee structure is similarly flawed and open to abuse.

If you are unsure about the fees being charged by a Bailiff you can ask for a break down of the fees being applied to your debt. You will have to request this in writing to the company that the bailiff is acting on behalf of.

Natalie Ceeney says that communication is the key in a dispute  It is almost a month since I started my new role, as chief executive at the Financial Ombudsman Service – the free service set up by law to settle complaints between consumers and financial businesses.
And, with the financial year just ended, we can look back on what has been another record year at the ombudsman – both in terms of the number of people bringing complaints to the service and the number of disputes we have resolved.
Over the last year almost a million consumers have contacted us with complaints across the full range of financial products and services, from pawnbroking to portfolio management and from motor insurance to mortgages.
Happily the vast majority of the financial transactions that take place every day run smoothly, but it is important that consumers know what they can do if something does go wrong.
Complaints
The business or company you think is responsible for a problem should have the chance to look into any complaint before the ombudsman steps in and decides who is right or wrong.
Many complaints are caused by misunderstandings that the business can quickly sort out, once you explain the problem.
Making a complaint to a business might seem stressful especially when it relates to your finances. So here are a few hints to help you take it one step at a time and to get your complaint taken seriously:
•What’s the problem? Before you make a complaint, be clear in your own mind what you think the problem is – and how you would like the financial business to put things right for you. •Stay calm. No matter how upset you are, try to stay civil and unflustered. You will get your points across much more clearly and effectively. Put yourself in the shoes of the person at the end of the phone, who you want to help you. Would you like someone shouting at you? •Write or phone? If you complain by phone, make sure you keep a note of when you called and the name of the person you spoke to. If you write, put “complaint” clearly at the top of your letter. •Keep it brief. It is always best to keep things short and to the point. Say simply and clearly what you are not happy with and what you want the business to do to resolve the problem. •Taking things further. Remember that the business must by law have a complaints procedure that it has to follow. If you are not able to resolve matters at this stage, the Financial Ombudsman Service may be able to help. The ombudsman
If you have complained to a financial business, but you are still not happy, you can refer the matter to the ombudsman service.

Almost all businesses selling, marketing or advising on financial products in the UK are now covered by the ombudsman  People do not usually need specialist help to bring a complaint to the ombudsman and where possible we prefer to hear from people in their own words.
We do not judge your complaint on the quality of how you present it to us, we look purely at the issue involved.
Almost all businesses selling, marketing or advising on financial products in the UK are now covered by the ombudsman.
However, we do not cover absolutely everything. For example, there is also a separate pensions ombudsman that looks mainly at problems to do with the running of workplace pension schemes. But complaints about the sale of pensions are covered by the financial ombudsman.
If you contact us and we cannot help for some reason, we will always try to suggest some other complaints body that might be more appropriate.
We will always explain any particular rules or restrictions that may apply in an individual case and give you the chance to query anything you do not understand.
If you would like the ombudsman to look into your complaint, you will need to fill in our complaint form. This will help us understand what exactly your complaint is about. We can help you fill in the form over the phone – on 0300 123 9 123 – or you can download the form off our website.
We also provide information about our service in different languages and formats, such as Braille, BSL, large print and audiotape.
Assessing a complaint
The ombudsman settles complaints on the basis of what we consider is fair and reasonable in the individual circumstances.

Disputes with financial services firms can be stressful If we think the business has treated you fairly we will explain why. But if we think it has treated you unfairly, and you have lost out as a result, we have the power under law to make it put things right for you.
We are a quicker and more informal alternative to the courts. But consumers who are not happy with any decision we reach still have the option of considering legal action instead.
The maximum the ombudsman can reward is £100,000. But most complaints involve considerably smaller sums of money. Our service may not suit you if your complaint involves more than £100,000.
You may also prefer to take your complaint to court, if you want to inspect all the papers personally, ask your own questions, or have a face-to-face hearing – as this is not the more informal way the ombudsman service usually aims to settle disputes.
Typical cases
A typical case is one when a woman returned home from work to discover her flat had been broken into and a number of items had been stolen, including some jewellery.
While her insurer said it was prepared to meet the claim, it insisted the items were replaced from a specific retailer and refused to offer a cash alternative.
When the ombudsman investigated the case, it was clear that she could not find suitable replacements for the stolen jewellery from the retailer suggested by her insurer.
Her request for a cash settlement seemed perfectly reasonable. So the ombudsman told the insurance company to pay the appropriate amount for the jewellery.
In another case, a man had just put his keys in the ignition of his car to drive to work, when his wife shouted down from the bedroom window that there was a phone call for him.
He quickly went back inside to take the call, not stopping to lock the car or take the keys with him. When he went back outside after finishing the call, his car was gone.
He made a claim on his motor policy for his stolen car. But the insurance company turned it down on the basis that the keys were in the car at the time it was stolen.
He brought the complaint to the ombudsman service. He said he thought the call had only taken around five minutes, and that he had looked out of the window to check on the car.
However, the policy wording clearly highlighted that claims made if keys were left in the car would not be covered. In the circumstances, the ombudsman said that the insurance company was within its rights to not pay the claim.

Robert Peston | 14:46 UK time, Wednesday, 20 April 2011

You might have noticed that my mind (and body) have been away from the day job. But I am so gobsmacked by the comprehensive defeat of the banks in the PPI case that my fingers felt compelled to tap on smartphone keys.

What probably matters most is that the judge has ruled against the banks on all important issues.

And two really mattered: first that the Financial Services Authority’s principles governing the behaviour of financial firms are a proper basis for compensation awards; and that FSA rules based on those principles are necessary but not sufficient for judging whether financial firms engaged in mis-selling.

Frankly if the banks had succeeded in proving otherwise, it would have been utterly disastrous for the whole system of consumer protection in the UK, both the existing system and the new one being erected by the government.

As it turns out, it is the implications of today’s ruling for the banks that are serious.

Unless they appeal (and I will come back to that question) they face having to make compensation payments of around £4bn to around two and a half million people (around a quarter of all PPI policies were allegedly mis-sold).

The damage is greatest for the two banks in which we as taxpayers have big stakes, Lloyds and Royal Bank of Scotland (which is just dandy for all of us) – largely because they have the largest shares of the retail banking market.

Lloyds faces the biggest bill: both it and RBS look as though they will have to pay compensation in excess of £1bn each.

That Lloyds and RBS appear to have done the most mis-selling in this instance will be seen by some as further evidence that their particularly powerful positions in retail banking is bad for the welfare of consumers – it will be taken as strengthening the argument of the Independent Commission on Banking that reinforcing competition is a priority (see my recent posts Banking Commission wants firewall around retail banking and Banking Commission: Retail banking must be ring-fenced).

The tab for Barclays and HSBC will also be pretty steep – some hundreds of millions of pounds each.

Given that few lawyers in my acquaintance rated the banks’ chances of winning the case terribly highly, it is slightly odd that they used the courts to minimise or delay making restitution – especially at a time when they are not exactly the most popular institutions in the UK.

It is even more curious that they have fought and fought to limit their liability in the light of the two main examples of mis-selling identified by the FSA.

First there were all those refusals to make payouts under the loan insurance plans to those who had a pre-existing medical condition – when it is clear that relevant customers had no idea that pre-existing medical conditions were grounds for non-payment.

Second, it is a logical absurdity that the policies should have been sold by the banks to the self-employed, given that is impossible for a self-employed person to be made redundant.

So what next? Well the banks could make those two and a half million victims of mis-selling wait another couple of years to be made whole by appealing to the Supreme Court.

Or they could take the view that the prospects of winning in any court are too slim to outweigh the potential for further damage to their respective public images from being seen to defy an unambiguous legal judgement that they let down millions of their customers.

Unless of course they regard their reputations as so impaired that there’s nothing left to lose from prevarication.

All advice should be free. Always ask to see your Advisors licence and always speak to some people they claim to have helped. Remember that if a proposal sounds too good to be true, it probably is!

A list of “organisations” and good web-sites to visit can be found at the end of this report. We at Phoenix & Co, also advise, free of charge, on all personal insolvency procedures.

Where to Go for Help and Advice.

There are 100′s of websites/companies offering debt advice and solutions-just choose wisely. The following reputable organisations provide free advice and are worth contacting.

Business Debtline is a charity that provides free telephone help for the self-employed and small businesses facing financial difficulties. Helpline on 0800 197 6026.Web is www.bdl.org.uk

Citizens Advice (CAB) is a charity that offers free, independent and confidential advice from more than 700 offices throughout the UK. Helpline on 0207 833 2181. Web is www.adviceguide.org.uk

Consumer Credit Counselling Service (CCCS) is a charity providing free counselling and money-management help to families and individuals. Helpline on 0800 138 1111. Web is www.cccs.co.uk

The Insolvency Service is a Government agency that covers all insolvency matters and provides excellent advice on the telephone 0845 602 9848, or via their website at www.insolvency.gov.uk

National Debtline offers free, independent and confidential advice over the telephone. Helpline is 0808 808 4000. Web is www.nationaldebtline.co.uk

Phoenix & Co offer free, independent advice to local South West businesses. Licensed Recovery & Insolvency Practitioners. Telephone 01392 314092. Web is www.phoenixing.co.uk

Credit claims firm investigated »
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100 claims companies cancelled as crackdown continues on firms who mislead the public »
Court lets woman off £8000 credit card debt »

• what was originally agreed
• what the agreement is now (if it has changed)
• how much is still owed.

If the lender fails to provide the requested information the agreement becomes ‘unenforceable’ which means the lender cannot get a court judgment against the borrower, take back hired items or items bought on credit, or take anything used as security (like a car) when the agreement was made.
However, the guide warns that, even if a credit or hire agreement becomes ‘unenforceable’, consumers would still owe any outstanding money to the lender, interest could be added to their loan or hire agreement, default charges could be made, and any failure to pay could impact on their credit record. The guide also explains that the debt is enforceable again as soon as the lender provides this information.

Ray Watson, Director of the OFT’s Consumer Credit Group, said:
‘Consumers have a right to information on debts they owe, but it is important that they realise that these sections of the Act cannot be used to write off legitimately owed debts.

‘Although the debt can be classified as unenforceable until the right paperwork is provided, people are encouraged to seek advice and help on how they can continue to repay the money they owe. Consumers can get free advice on debt by contacting Citizens Advice or the Consumer Credit Counselling Service.’

NOTES
1. See guidance for consumers and a separate guide for the credit lending sector on the unenforceable credit agreements page.
2. The guidance incorporates the findings of recent High Court cases. Sections 77-79 of the Consumer Credit Act 1974 (the CCA) allow a consumer to request (amongst other things) a ‘true copy’ of his/her agreement. The High Court ruled that a true copy does not have to be a photocopy or an exact copy of the original. The lender is allowed to provide a reconstituted agreement, as long as that version is accurate and contains all the original information apart from the few exceptions that the law allows (which include the signature, signature box and date of signature). The judgment in Carey v HSBC Bank Plc [2009] EWHC 3417 can be found on the Judiciary of England and Wales website.
3. At the beginning of this year, the OFT prepared and consulted on draft guidance, after it became clear that there were a number of misunderstandings about lenders’ obligations under Sections 77-79 of the CCA, and the impact on the enforceability of debts. Today’s final guidance clarifies the OFT’s position.
4. Under the CCA, businesses that offer goods or services on credit or lend money or are involved in activities relating to credit or hire must be licensed by the OFT. The OFT has a duty to protect the interests of consumers by monitoring the fitness of those holding or applying for licences.
5. Consumer can find general information about debt management from www.directgov.uk