Debt charities could have their funding cut in 2010. But where will this leave struggling borrowers?

Debt Help Charities in the United Kingdom play an important role in helping over-indebted consumers resolve their debts, without charge. However there must now be serious concern about their future if the level of their government funding is in question. 

The Citizens Advice Bureau sees on average, 9,300 new debt enquiries every working day and it was reported that National Debtline was unable to answer around 20,000 telephone enquiries in one month alone, not the year! 

With an estimated four million debt enquiries generated throughout 2009, some of which will arguably be multiple applications to numerous debt management agencies, there are still a huge number of consumers that need help in getting control of their debts.    

Although difficult to be precise, many experts believe that the free sector of the debt advice industry can only cope with around two million enquiries per year. So where does this leave the rest, especially when funding for these agencies is under threat? 

Scare-mongering I hear you say? Not necessarily, given a comment made to me at the recent Debt Resolution Forum’s annual conference in Manchester. 

I got the chance to ask Greg Hands, the Conservative Treasury spokesman, whether his party would maintain, increase or decrease the level of funding to the charitable debt organisations, if elected to power. 

The answer was short and to the point: “We cannot rule out cuts to this funding”. 

So what if cuts are to be made? It is debatable whether any party, if elected, will be able to afford to continue or increase the level of funding to charitable organisations to help them bail out over-indebted consumers, whose position in any event, many will say, is there own fault. 

Many consumers find it too stressful to approach their lenders when in a time of crisis so instead they turn to Debt Management Companies, (DMCs). These are firms that act as a go-between for a consumer in debt and negotiate an informal arrangement with the lenders. 

Payments are usually made monthly by the consumer to the DMC and they in turn distribute a payment to the lenders. The consumer that needs such a service can either go to a charity organisation and not pay a monthly fee for this service or employ a debt management company and pay a fee, usually set at 15% plus vat of the monthly payment in the plan. 

There are numerous arguments for and against paying for debt service, (not  to be confused with debt advice). 

With a non-fee firm it can take anywhere between six and ten weeks, according to volume of workload, to set up a telephone appointment to go through one’s finances. For some this is just too long and which is why they then go to a fee charging firm as it will generally deal with the issue on the same day contact is made and some will say that this is what you pay for. 

The alternative is to queue up outside the local CAB office, in front of all and sundry, in the hope you can get some immediate advice. Even then the CAB only gives your case a limited shelf life because they have a flood of other cases coming in everyday. 

There are pros and cons for using either arrangement but with more and more consumers expected to call for advice next year, where is the money to fund the support needed going to come from? All the political parties, bar the present Government, are stating there will have to be cutbacks, which is why I am raising this concern now.

Here’s a contentious question for you.  “Should consumers now be expected to pay for debt service? After all you pay to use a solicitor or accountant so why should you not pay for professional debt service”. 

The counter argument is that people suffering with debt issues cannot afford to pay for help – they are broke, after all. But if it is decided that the consumer can do an individual voluntary arrangement (or IVA) then lenders pay the fees, not the borrower, so that argument does not stand up. 

Anyway, I argue that you should give the consumer the right to make an informed choice as to what they want to do. Both the non fee and the fee charging firms have good and bad points. People pay for private education and healthcare, why? Because they want an improved level of service. 

It is clear that the debt management industry is changing fast and is edging closer to full regulation, which I support.  But the issue of how much and whether enough funding there will be to help consumers, come the election next year, is a concern not just for consumers but for lenders and those that work in the free sector. 

New rules mean there is a distinct possibility that the fees in a debt management plan may be capped, and there is no decision as yet whether fees will be paid by lenders. 

Such a move would put the non and fee-charging firms on a level footing and not a bad idea at that. Expect a lot to happen over the next four to six months. 

If you are struggling with debt, don't just ignore the problem and hope it will go away, we have our top 10 great links to help you;

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Debtwizard guide to Individual Voluntary Arrangements (IVAs)

Debtwizard guide to Bankruptcy

Debtwizard guide to Debt Relief Orders (DROs)

Debtwizard guide to Debt Management Plans

Debtwizard guide to Debt Consolidation Loans