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| BankruptcyNews |
Posted - 09 October 2007 : 10:13:08
Not Much You Can Do But Watch the Consumer Debt Crash Coming
Let’s put the whole Insolvency Exchange, TIX, Northern Rock, HSBC and Individual Voluntary Arrangement (IVA) mess aside for a moment and read the tea leaves. Call me crazy but the storm clouds of consumer debt on the horizon are looking fairly dark and heavy and worth considering the forecast. Recent articles from BBC are pointing that way as well.
While not that long ago pundits were saying that the subprime mess in the United States would have little or no impact on the United Kingdom, I think that Appletart and his lads at Northern Rock would have a different POV on that. In that same change of mind crowd are probably a Brown King Darling.
For a long time now, seeming prosperity in the UK has been built on the backs and shoulders of consumers willing to borrow and spend to push sales and consumption. Companies have been behind that, banks love it, the government offers self-congratulatory accolades about how strong the economy is, but consumers will suffer.
It’s not like UK consumers discovered a hidden gold mine of free money and grabbed and spent that with vigor. The money came from somewhere and most of it has come in the form of created money through banks loans, mortgages, tapping equity or the good old fashioned line of plastic credit, the credit card.
I’m sure that collection departments at banks are saying the future will be just fine while the economists at the banks are biting their nails knowing that economies are cyclical and when you have a hot economy and someone cuts of the burner, the balloon is going to sink. That’s just the way it works.
Granted it will never sink to terra firma but the potential for great consumer damage is ever present as long as there is a reasonable concern that credit sources will get tight. When lenders stop lending, consumers stop spending on credit once they are maxed out or broke and the economic engine begins to sputter.
In the U.S., consumers have continued to spend because optimism about the job market remains in the okay range. But all of that spending is based on feelings rather than facts. If U.S. consumers, whose paper wealth is built on home equity and traded assets, realized the inherent risk of that money vanishing or being significantly reduced then the “spend for tomorrow” mentality would be replaced by the “save for tomorrow” mentality and that is not in the economic interest of any government.
The Perfect Storm Part Two
So let’s look at what has happened in the past few years in the UK and see why it can spell trouble.
First, on the PayPlan and CCCS front, creditors have made reductions in fairshare and I would imagine that they aren’t that many percentage points away from expenses running into income from DMP work alone. Creditors pay these groups based on how much the creditor wants to “give” them based on the amount of money they collect from debtors and return to consumers. Think about it like charitable debt collection, except PayPlan isn’t a charity, even though for a long time they have played one on television.
Creditors are likely to continue to cut the money they pay PayPlan and CCCS to collect from consumers and history has taught me that they make these cuts, not because it is logical, but so they can reduce the amount they spend for these friendly collection services since the creditors call the shots.
If you can get a bunch of bankers drunk, not all that hard, and ask them how they feel about credit counseling in the U.S. they will tell you that they tolerate it but would rather not have to deal with them. And in the U.S. the banks have proved this time and time again as the money they pay these groups is slashed to all time lows and now the creditors are moving to “grants” based on some unknown formula. This formula allows creditors to review the books of the credit counseling agencies and make funding choices based on how much money they want them to have. Dance, monkey, dance.
Now the U.S. is important to us on this island because we’ve got some of those very same creditors here in the UK and a free VOIP call across the pond will tell creditor executives here all they need to know about how to put the squeeze on PayPlan and CCCS. All the free dinners and trips spent on those executives is not going to stop the word from HQ to slash fairshare expenses.
Now at the same time we’ve been living with the mandates from the Insolvency Exchange (TIX or Ticks as some say) that have elected to tie their wagon to the creditors and lay down the law of fee reductions for Insolvency Practitioners. If you’ve noticed TIX and their merry band of HSBC, HBOS, and RBS have been using the same fee cram down approach usually reserved for credit counseling agencies. Someone needs to tell the band in Nottingham, “Dude, the legend is that you rob from the rich dumb ass, not the poor.”
Insolvency Practitioners, a fun and decent enough lot, have almost rolled over on holding back the TIX changes because they can’t seem to develop enough critical mass behind an industry representative to really fight this battle hard. The result, TIX creditors will push fee cuts and other creditors will say “Hey, if they are only paying X than we only want to pay X.” It is inevitable.
Fee cuts among the PayPlan, CCCS, Insolvency Practitioner crowd only lead to one end point and that place isn’t any good for consumers. It’s dark, painful and cold. Fee reductions lead to consumer assistance groups ramping up client acquisitions to increase volume to compensate for earning less per client. This “turn up the volume” approach inevitably leads to the end of innovation and/or a reduction in personal attention for individual clients because these groups will not be able to staff up in a decreasing income environment.
Of course those groups like Myvesta that have planned from the very beginning for these days to come are better prepared to avoid that type of slash and burn activity. No fancy office and no heavy payroll will make the smaller groups more nimble and better able to survive the rocky seas in the storm.
Creditors have little control over the mass of debt management companies that charge monthly fees for service because that agreement is between the consumer and debt management company directly, and it is perfectly legal. So creditors will start to take aim at debt management companies and hurting consumers at the same time by reducing the interest rate reductions they give to consumers now in repayment plans. As I understand it Barclyacard did just that this past week.
If creditors wanted to be really vindictive they would lobby to pass new laws to prohibit for-profit debt assistance. Keep an eye on your local MP to make sure that doesn’t happen.
Creditors would prefer that consumers did not go to any third-party that could offer independent advice and assistance and would prefer people to come knocking directly at the door of the collection department. They perceive that if the consumer dealt directly with the collection folks in-house that quotas would be easier to meet and they could get their hand on every last £ available. This isn’t callous talk, just true.
The primary reason creditors would want to see PayPlan, CCCS and the rest of the debt management companies vanish is because they want to cut out what they perceive to be the middleman and deal with the debtor directly. But that approach is prone to fail because people find a great benefit in having third-party representation and making one payment that satisfies all their debt payments.
Inevitably what happens is creditors get their clients to call and make a promise to pay to them but the plan does not succeed because the debtor’s other ten creditors are screaming for money and payment promises as well. With so much noise the debtor often easily over promises and under delivers and is left broke, on the hotter end of the poker, and still in debt.
Conclusion
Consumers lose in this game with banks and lenders. The banks are not smart at all when it comes to putting in place collective and effective solutions to help consumers to deal with financial problems. Debtors will be strung out on credit until they break or the creditors pull back because of economic risk and then at that time we’ll have to see what tools are around. Let’s just hope that the foolishness over hurdle rates and IVAs has gone by then otherwise we will have a lot of people going bankrupt that could have and wanted to repay their debt through an IVA.
I hate to say it but many times the best solution for debtors is to go straight to bankruptcy, swallow the bitter pill, and remerge on the other side to start a new financial life. I know that sounds strange but if creditors put up hurdles to repay, gut the very groups that are here to help and don’t consider people’s situations fairly, individually or sympathetically, what message do you think they are sending already?
Source: myvesta.org
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