Several warnings have been issued about debt management businesses creating more financial strife for Australians than they solve, charging “extortionate fees” and having a nasty sting hidden in their service contracts.
On Monday (4 November), Western Australia’s Consumer Protection agency issued a warning about such agencies that charge fees for their services, noting that a number of complaints have been received about fees being charged for services that are not delivered.
It said that some consumers had signed contracts that, without realising, would lead to caveat being placed on their property to block it from being sold until the fees are paid.
Some people, according to Consumer Protection, had been approached by budget or debt management firms after their names appeared on court lists.
“When financial difficulties lead people to facing court because they haven’t made payments on their debts, are about to lose their homes or have bills outstanding, the last thing they need is a company approaching them uninvited promising to be the answer to all their financial problems but putting them further into debt than they already are,” Consumer Protection commissioner David Hillyard said.
“These consumers find themselves in a desperate situation and are vulnerable when approached by someone promising a debt-free and stress-free life by helping to solve their money woes.
“In some cases, the consumers report that they are charged high fees, often many thousands of dollars, at a time they can least afford it. But, once the contract is signed, the services promised do not resolve their debt issues and their financial situation is made worse, not better.”
He continued by stating that “it is particularly problematic when consumers don’t realise that the contracts they sign agree to a caveat being placed on their property so that their home can’t be sold, until the fees owed to the company are paid in priority to any other debts”.
A day later, the Consumer Credit Legal Service (WA) issued a separate warning, comparing some debt management businesses to vultures who “prey on [clients’] misfortune to make a profit”.
“At a time when these consumers are under extreme stress and in some cases fearful of losing their homes or other property, these debt vultures swoop in to sign them up to supposedly help them to manage their debt, but often they just get into even more debt,” the service’s managing solicitor, Gemma Mitchell, said.
“Often they get threatening messages from these companies saying their bank will repossess their home unless urgent action is taken, creating even more fear and stress.
“Extortionate fees, in the thousands of dollars, are charged when the consumers can least afford it, and many clients claim that the fees are charged for services that were not delivered.”
Ms Mitchell added: “To make matters worse, the contracts empower the debt vultures to place a caveat on their home, preventing it from being sold until the outstanding fees are paid.”
Neither agency named the offending businesses, instead warning Australians in financial trouble to be wary of such services that are offered by private agencies.
“We advise consumers in this position not to succumb to these predatory practices and not to sign any contracts until they have received some free financial counselling and free independent legal advice,” Ms Mitchell said.
Consumer Protection’s Mr Hillyard agreed that fees for such services should be viewed with caution, particularly where the businesses are “aggressive and persistent communicators”.
“We urge consumers to resist the pressure these companies put on them to enter into service contracts,” he said.
“Don’t be tempted into signing a contract with budget and debt management companies without reading the terms and conditions thoroughly and understanding the implications if you are unable to pay the fees on top of your other debts. Go and speak to your local community legal centre or a financial counsellor.”
Mr Hillyard added: “Numerous community legal centres operated and/or funded by the government offer free legal advice and may be able to assist consumers affected by these budget and debt management companies.
“Consumers can also get free assistance from financial counsellors in both budgeting and managing debts. Consumers in financial trouble should explore these free options first before engaging a profit-driven private company.”
While WA based, the warnings may be applicable nationwide. The Australian Financial Complaints Authority (AFCA) revealed that debt collectors or buyers were the fifth most complained about aspect of financial services over the year to October 2019, with 2,902 complaints lodged from across the country.
Small businesses struggling to manage their debts can contact the National Debt Helpline, speak with the ATO about a possible payment plan for tax and super debts or seek out financial counselling services such as those listed on ASIC’s MoneySmart website.
My Business also has a webcast on business cash flow taking place on 21 November 2019, with panellists discussing strategies for overcoming cash-flow problems that can lead a business into financial difficulties.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.