Debt management or "credit repair" services can make some alluring promises to those with financial problems. They say they can silence the phone, turn away the debt collectors, wipe away black marks from your credit record - and make those money woes go away.
But so often these promises are not met. In too many cases, people in financial trouble can end up in an even worse position after paying hundreds of dollars to these operators for very little, if anything, in return.
When are you eligible for a repair, replacement or a refund? The Australian Consumer Law gives you more rights than you might know.
One of the things debt management firms promise is to help those in financial hardship to manage their budget. This might include paying money into the firm's bank account and letting it handle your creditors and repayments. While a single repayment sounds convenient, too often the debt management firms will take a big cut in fees. There are even stories of firms remembering to take their fees on time but forgetting to pay your bills, and so the debt collectors keep calling.
Some firms spruik "credit repair services" and promise to remove negative listings on your credit record – of course for a handsome fee. An investigation by ASIC found that debt firms charge high upfront fees of anywhere between $495 and $1095 for this service and these fees do not even wipe your credit record clean. These are payments just to remove one listing.
Debt management firms never tell their clients that it's actually impossible to remove negative credit listings unless there is an error in the listing and the fees are the same regardless of whether or not they are successful in getting the negative listing wiped.
This precise scenario happened to Ben (not his real name) who called a credit repair company after seeing an ad on TV promising to wash his credit history clean.
The salesperson called back with good news – they would be able to fix his credit history. They promised to send him a booklet, forms to return, and to assign him a case manager to help him as long as he was able to pay $1000 immediately, otherwise they'd have to start the process all over again.
But as Ben discovered, they were more than happy to take the money, but they did not provide the service. In fact, Ben didn't have any defaults or incorrect listings to "fix". The credit repairer hadn't bothered to check his credit report.
Ben's repeated requests for a refund were ignored until consumer advocacy organisation, Consumer Action Law Centre got involved and helped him sort it out.
It's a pretty shady place these firms get to hang out in to recruit new customers, in some cases looking to find new clients by trawling through court records to find the names of people with debt judgments against them.
Given the financial vulnerability of their client base, it's deeply concerning that these firms are able to charge hundreds of dollars upfront to financially stressed people with the vague and often undelivered promise of helping them to manage their debt. It's not uncommon for these firms to offer new lines of credit to clients to "help them" manage their way out of debt.
A 2016 report by ASIC found that debt management firms had "opaque" fees, costs were "often high and heavily front loaded" and the quality of advice was patchy where "some firms had a poor understanding of the relevant law" and little information was given about risks to clients.
ASIC has recently fined some of these firms for misleading statements when they have claimed they were backed by the federal government or by big banks, when they were not.
However, ASIC is very limited in the oversight it has of debt management firms.
This is because debt management firms live in a regulatory void – they're not regulated as financial advisers nor are they regulated under the consumer credit framework.
In a sense they operate in the financial services equivalent of no-man's land and it's time this changed.
For a start debt management firms should be required to act with integrity and in the interests of their clients. They should be required to provide appropriate advice and they should have to ensure that their employees are trained to provide assistance to people in financial hardship. They should be forced to sign up to an ombudsman scheme so that people who have complaints can access a quick and free external dispute service.
Debt management firms should also have to disclose the fees they charge and be required to tell clients about the availability of free alternatives to help them, including, ombudsman services, community legal services and financial counsellors.
It's time that people struggling to manage their debts are given appropriate consumers protections when it comes to dealing with these firms. Consumer groups are on board, community legal centres are on board, as are the banks.
If debt management firms are to operate, they need to be regulated like every other financial service. They cannot be allowed to prey, like vultures, in an unregulated environment on vulnerable people who are often facing the most difficult time of their lives.