Creditors lend hand to cash-strapped debtors

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The Independent Online
A NEW type of debt counselling service paid for by creditors opens in Leeds on 19 July.

It is modelled on a system pioneered in the US, which has helped thousands of families, despite the apparent conflict of interest with lenders as paymasters.

A team of advisers helps debtors to work out a repayment schedule, has the collection agencies call off the dogs and even arranges for lenders to forgo interest and late penalties. Instead of abandoning them to the bankruptcy courts, the Consumer Credit Counselling Service (CCCS) offers delinquent debtors a chance to return to the credit market when their debt is repaid, often in only three or four years.

The Leeds service, which received start-up finance from several lenders, including Barclays Bank, GE Capital Retailer Financial Services and the Leeds Permanent Building Society, will work in the same way. Creditors will give the service the equivalent of 15 per cent of debts repaid, although all of a debtor's payment will be used to reduce the debt.

Citibank, America's largest issuer of credit cards, reports that some 65 per cent of US cardholders who start a CCCS plan complete it. Credit-reporting agencies, which keep track of creditworthiness, describe the system as a 'unique confluence of interests'.

'Everybody gets something out of it,' says Norm Magnuson, a spokesman for the Association of Credit Bureaux.

Most major creditors have gradually come to embrace the scheme, as they realise that credit counselling - while it costs them millions in waived fees and finance charges - offers the best chance of recovering some part of the dollars 20,000 ( pounds 13,400) or so they have lent to a typical financially precarious household.

Therein, however, lies the main problem. . American consumer advocates complain that individuals applying for help from a CCCS cannot expect the counsellors to talk about all the options available to them, including bankruptcy.

'While we only advocate bankruptcy as the last, last resort', says Ruth Susswein, assistant director of Bankcardholders of America, a lobby group for charge-card users, 'there are some people who might be better off in bankruptcy.'

Credit counsellors funded by self-interested lenders are unlikely to recommend this option. But some critics say the CCCS centres are also limited in their ability to discriminate between legitimate debts that a borrower is morally obliged to repay and debts that resulted from fraudulent sales and lending.

'Even in the case of an obvious rip-off, a CCCS is more likely simply to add up all of your debts and set up a pro rata repayment distribution for everyone,' says Ken McEldowney, executive director of Consumer Action, a San Francisco advocacy group.

So pervasive were these failings at one San Francisco CCCS office that a group of counsellors resigned en masse this spring. Mr McEldowney says the conflict of interest created by the funding structure 'seriously compromises' the whole credit counselling concept, at least in its dealings with the most cash-strapped of its clients.

Yet like most critics of the system, Mr McEldowney endorses its effectiveness for the majority of over-extended borrowers. It restrains creditors from rushing to take everything they can, points out Bill Cullinen, the Atlanta-based director of collection services for Citibank's credit card division. And it does mean someone interceding on their behalf and ending the hounding of collection agencies.

Others argue that with its stigma waning, some Americans are taking the leap into bankruptcy too quickly without realising there are long-term costs. The CCCS 'is a useful halfway house', says Mr Magnuson.

(Photograph omitted)