You might hate history, but this is an important lesson
People keep asking me for information about what happened in the US with the gutting of credit counselling and asking if it is similar to what is happening to the Individual Voluntary Arrangement (IVA) in the UK. Here is the start of an article that I wrote before, but had not published till now.
I sat down to write a fairly tale about a land far away where a brave debt advisor faced the dragon and fell for the other side’s promises when they waved the white flag. But no matter how hard I tried to write the tale it just kept coming out like a Stephen King horror novel when the princess gets slaughtered at the end.
Back in the United States starting in 1994, I founded and ran a large independent debt management organisation and I latter served on the board of directors of a Consumer Credit Counselling Service (CCCS) office so I know a bit about the truth I am going to share with you.
Back in those days creditors provided a 15% fairshare (compensation) to help fund the operations of the debt management companies. However, creditors only funded primarily CCCS and not all debt management companies that performed a similar service and function.
A couple of years latter a group of agencies got together and sued the creditors for antitrust issues and the creditors decided to offer everyone the same 15% fairshare. The legal action had a positive impact and stopped the creditors at that time.
As a result of that new funding it allowed groups to be able to do a lot of community outreach to help consumers. I used the extra funding to create the first in-patient treatment center for compulsive spending issues, created intensive educational information distribution campaigns, conducted national consumer polls, did research for educational news releases, appeared on major television networks as a consumer debt expert, created video financial education work and we had a nationally syndicated advice column that appeared in 50 newspapers around the country. We also wrote books and articles that we gave away for free.
Other groups did a lot of other types of community work to help consumers. Some did in-school financial education and community presentations, while other worked inside companies to help workers with money troubles. The extra funding was crucial and beneficial and directly helped consumers.
A few years later the creditors came to the agencies and said “Rapunzel, Rapunzel, let down your hair, so that I may climb the golden stair.” No, they actually said, if you do us a big favour and implement some changes that will streamline the submission of repayment proposals and send us electronic payments, we will reward you by keeping your compensation at the same levels. They flat out lied.
The hoops started coming out to be jumped through once they knew they could control agencies with demands linked to compensation ("Golden Handcuffs"). It became one demand after another and the funding “fairshare” that used to be paid without strings started to be tied to debt collection performance by the Consumer Credit Counselling Service offices. Even though they were all supposed to be a charity, they were basically converted into fee for performance debt collectors instead of a true consumer outreach. Latter their charitable status was called into question because the tax authorities claimed that the primary activity of debt collection is not a charitable mission.
Today in the U.S. the amount of funding from creditors is down around the 6% level or lower, having been cut, more and more after yet more control by the creditors.
Many debt management companies were afraid to speak out at that time about the changes and many of them are now gone. They figured that if they spoke up, the creditors would retaliate against them and cut their funding even more. They hoped that in their silence that the storm would blow past the island and a new day would dawn. Instead the dawn was a red sky, “Red sky in morning, sailor take warning” was the old mariner cry. In the end, being afraid and silent did nothing to protect them.
As a CCCS Director I attended several national meetings on the agencies behalf. The private meetings were all about how the groups could appease the creditors so the creditors would stop cutting fees and turning away consumers. Some members expressed concern over being turned into nothing more than debt collectors, and the last major group of members just kept saying that if we went along with the creditors, everything would be okay.
I still have my notes from those meetings and they contain notes from presentations with statements like: “Critical time for NFCC (CCCS parent group in US) due to implication of reforms”, “Repositioning opportunity with creditor partners”, “Alignment of board and CCCS partners is important”, “Must align with creditor partners”, “Must be thoughtful on how we address creditors”, “Better to lose short term battle and win long term”, “Industry at crossroads”, and “Seems there is much uncertainty in future”.
You can read my 2005 national press release statements in the US about these issues and see how similar the situation was/is to the UK today. Credit Counselling Warning and Danger for Consumers.
Many smaller debt management groups went out of business and the larger groups that survived did it by cutting costs by offering a lot less service to consumers (creditors just made sausage factories out of them with the cuts and compliance demands) and many debt management companies are still under a multi-year IRS audit to justify their actions and charitable status.
The larger credit counselling groups hoped that they would be able to make up the reductions in income by increasing volume but since creditors kept reducing funding, they just worked harder and did not make up much ground.
Is it sounding familiar yet?
Unless we learn from history and do not repeat it we are doomed to enjoy the same outcomes here in the UK. Unless we stand up to say to creditors in the UK and tell them that their hurdle rates are an abomination against treating consumers fairly, it is bad to not review all individual IVA proposals on their merits, that control of regulated Insolvency Practitioners by non-regulated companies is not OK, and that flat out rejection of Individual Voluntary Arrangements (IVA) is not right; then consumers of the United Kingdom will suffer the same hurtful fate as their debtor brothers and sisters across the pond do today, a lack of real independent consumer representation or help when faced with problem debt.
In the States we did not have IVAs but I tried to bring them into place for five years. I used the lessons learned from the UK to put forward fair, reasonable and sustainable repayment proposals and ran into a creditor brick wall. I was amazed back then that the UK would be so forward thinking as to create a process that really tried to be fair and balanced to consumers and creditors. I just saw that the IVA was an admirable process that needed to be aspired to since it allowed debtors, with the representation of Insolvency Practitioners, to enter into a binding agreement to repay their debt.
In the US, after five years of trying, we finally gave up and just started telling people to go bankrupt. No matter how reasonable or sensible the proposal was, each creditor had their own reasons, excuses or marching orders about why they needed a higher monthly payment than creditor B, even though they knew it was not affordable to the debtor and the plan would fail.
Still sounding familiar?
If we leave debtor fairness, reasonableness and logic in the hands of creditors, it will fail. This is why government is needed to implement public policy to create fairness and balance where it does not exist.
For many reasons (selfish actions, group think, bad policies, intentional consumer punishment, a culture that customers are slime, etc.) creditors don’t seem to see the greater picture. The concern is almost always only about their slice of the pie and unless the UK radically changes the IVA process by legislation to allow good people that want to repay their debt without bankruptcy, a realistic chance and opportunity to pay, those good people will be relegated to the dung heap. And that’s the truth.
