Debtors’ Britain: winners, losers, good guys – and the rest

WOMEN, the long-term sick and people from ethnic minorities cope more poorly than the general population in dealing with their debt problems, while elderly people can expect more tolerance from creditors. 

A major new piece of in-depth independent research for fee-charging debt companies’ trade association The Debt Resolution Forum (DRF) has found that different types of struggling debtors can expect very different experiences as they seek to get to grips with their borrowings, despite insistence by creditors such as banks and finance companies that they treat everyone equally.

The report, by independent research co-operative Zero-credit, found high levels of satisfaction among debtors who had used the paid-for debt advice sector, with scores of nearly nine out of ten for their advisers having their best interests at heart. This led the researchers to conclude that paid-for advisers ‘are not to be mistaken for the widely-held perception of fee chargers who exploit the vulnerable’.

BUT the research clearly showed also the different treatment experienced by different groups.

– Women were nearly twice as likely as men to seek Debt Relief Orders, the “‘quickie’ procedure to avoid bankruptcy available for those with little income and few assets. They also reported higher incidences than did men of increases in interest payments, of penalties and charges and of calls and visits at unsocial times.

– Minority ethnic debtors were twice as likely as those from the UK white community to report that creditors had served notice of legal action even after the debtor had entered a debt-solution scheme. Such debtors also reported a higher debt to income ratio than did those of UK white origins. This research mirrors similar findings in the DRF’s 2012 research.

– People with long-term health problems were treated no differently by creditors than those in good health, said the report,  ‘whereas one might expect some evidence of greater forbearance for borrowers in difficult personal as well as financial circumstances’.

– By contrast, elderly problem debtors seemed to be treated with greater understanding. The research found: ‘There was a marked tendency for respondents in the over-60 age range to report significantly lower levels of creditor intervention, pre and post-solution, than those under 60.’

– Parents with mortgages or who were renting privately seemed more likely to encounter debt problems than those living in social housing. The research found that: ‘Parents were more inclined to report increased outgoings as the main reason for seeking help than non-parents.’

– There are fears that a submerged group of poorer problem debtors may have entered informal repayment plans against their better interests. Such plans have no fixed end date and offer no protection to the borrower against increases in interest payments or other charges.

The research has been carried out on behalf of The Debt Resolution Forum  (DRF), the specialised representation, training and standard-setting body for the paid-for debt advice sector.

Along with examining how members of different social groups fare in terms of dealing with their debt problems, the research looks also at the differences between the sort of problem debtor who seeks help from a DRF member and those who turn instead to the free debt-advice sector.

A range of debt solutions is available to both types of advisors, from bankruptcy and Debt Relief Orders (DRO) to Individual Voluntary Arrangements (IVA), under which (only in IVA’s) creditors agree to forego a portion of the money owed in return for the repayment of the balance and debt management plans, essentially private arrangements between debtor and creditor.

The research noted: ‘Overall, this sample was characterised by middle-aged, mortgaged homeowners, yet the extent of shopping around for a range of advice before approaching a DRF member and satisfaction with pre and post-contract services, was often consistent with age. As a rule, over-40s were slightly more independent and discerning than younger respondents, but there was no pattern of under-informed or vulnerable decision-making.’

Clients of DRF member firms reported very high levels of satisfaction.

Scored out of ten, clients gave DRF members 8.72 in agreement with the statement: ‘I felt they had my best interests at heart’ (up from 8.45 in the same survey in 2012), 8.45 in agreement with the statement: ‘I felt involved in choosing the best solution’ (8.06 in 2012), 6.9 in agreement with the statement: ‘I learned about some other places to find help’ (5.2 in 2012), 8.72 in agreement with the statement: ‘The possible risks of each solution were explained calmly’ (8.14 in 2012), 8.77 in agreement with the statement: ‘They explained the solutions that they could offer clearly’ (8.48 in 2012) and 9.01 in agreement with the statement: ‘I felt confident that they understood my circumstances’ (8.72 in 2012).

There was also a high level of satisfaction with the results of the debt solutions provided by DRF members. Thus 79.4 per cent reported improvement in terms of managing their money (79.7 per cent in 2012), 74.4 per cent reported improvement in terms of ability to plan ahead (75 per cent in 2012), 71.2 per cent reported an improvement in their ability to choose suitable financial products (70.7 per cent in 2012) and 66.8 per cent reported an improvement in terms of their ability to find financial advice and information (69.9 per cent in 2012).

The perception by clients of cold calling by DFR members to people thought to need debt advice is in sharp decline. Between 2012 and 2013 incidences in which the initial contact was thought to have been made by a DRF member rather than by a potential client more than halved, to 16 per cent of respondents.

The research showed ‘a strong desire to leave the debtor population’ among those seeking help, adding: ‘DRF members’ clients expect prompt rehabilitation to the mainstream population of personal finance consumers’, suggesting: ‘To a large extent, the economic recovery derived from consumer confidence could be deemed as dependent on this.’

Regarding the high levels of satisfaction, the research notes: ‘Average performance ratings were in the range of good to outstanding, irrespective of demographic subset… Of course, there will always be some element of respite or relief that biases ratings in favour of advisers and providers because the inability to repay debts can be stressful and borrowers, who use an intermediary, free or fee-charging, are effectively handing their burden to a third party’.

‘For this reason, the levels of informed choice apparent in these survey results are important because they demonstrate that the vulnerability of indebtedness has been removed promptly and handled with integrity.’

But the researchers warn that creditors need to look at their procedures. While the proportion of respondents reporting that creditors had made contact prior to the debtor signing a debt-resolution contract of some sort fell from 87.2 per cent in 2012 to 81.5 per cent in 2013, the proportion reporting contact from creditors after such a contract had been signed (when creditor chasing should cease) rose from 21.8 per cent in 2012 to 40.8 per cent in 2013.

The report raises a range of other serious concerns about creditor behaviour.

‘There is a strong message to creditors in that debtors may experience intervention and debt collection differently to how it is intended.’

‘The apparent forbearance towards the over-60s compared with other age ranges, the significantly lower incomes of women debtors, the higher debt to income ratio of those from minority communities, the similarity of experiences irrespective of health and the comparative lack of forbearance towards mortgaged home owners and especially those with children, all have a bearing of public perceptions of financial services.’

It adds: ‘It is not acceptable when this is perceived as prejudiced, and least of all when experienced as such by some of the more vulnerable sub-sets of the debtor population.’

In terms of women’s experience in particular, the research states: ‘There is a very real question about who is carrying the burden of personal debt in the UK’.

The lower level of income of female problem debtors affects the available debt solutions, as some, such as bankruptcy, are more expensive than others. The research states:‘Insolvency figures have been contracting since their peak in 2010 and this is often taken to mean that indebtedness is falling. In fact, bankruptcies and IVAs have declined, while DROs have continued to increase.’

‘These are specifically for people with low incomes, few assets and low debt levels, and many more women use DROs than men do – the ratio is just under two to one.’

It is also thought that a hidden number of poorer people may be involved in informal debt-management plans, against their best interests. ‘Historically, informal solutions were used by people with lower debt levels and sufficient income or assets to service repayments. However, increases in the cost of bankruptcy and creditor pressure to recover more from IVAs have seen the uptake of these solutions decline, against a nationwide trend of increased seeking of debt advice.’

This means, according to the report, that many more people may be involved in informal debt plans which may give them much less protection against interest and other charges and no fixed date for completion, unlike IVAs, for example. ‘Because women earn less than men, they are more likely to be involved in prolonged periods of repayment rather than obtain a definitive resolution to their debt problems.’

In addition: ‘Women reported a higher incidence of the same or increased interest, penalties  and charges than men and of calls or visits at unreasonable times and confusing communications before starting a debt solution.’

‘A higher proportion of men experienced no creditor intervention after entering a debt solution.’

The report concludes: ‘The regulator needs to impose far more detailed records of borrowers’ demography, social and economic circumstances on lenders and to ensure that this information is managed carefully through debt collection and resolution.’

‘Debt professionals from all aspects of the customer’s experience need to liaise to ensure that borrowers who respond to difficulty by seeking help and agreeing repayments are rewarded for the respect that they have afforded their creditors in seeking a prompt resolution.’

See below the full reports connected to this research by independent cooperative Zero-credit:

Demographics Executive Summary
KPIs Full Report
Demographics Full Report
Technical Appendix