Owe a lot? Here's how to keep out of the jaws of the loan-sharks

The lower end of consumer credit, the part inhabited by debt-collectors and loan-sharks, is rising to the top of the Government's agenda again. The Office of Fair Trading this week issued its latest code of behaviour for debt-collectors, and that is due to be followed by a White Paper on consumer credit in the autumn.

The lower end of consumer credit, the part inhabited by debt-collectors and loan-sharks, is rising to the top of the Government's agenda again. The Office of Fair Trading this week issued its latest code of behaviour for debt-collectors, and that is due to be followed by a White Paper on consumer credit in the autumn.

The new code stresses that collectors should not bypass a debtor's appointed representatives, whether Citizens Advice (formerly the National Association of Citizens Advice Bureaux), or an independent advice centre. So it is more worthwhile for debtors to enlist help to sort their finances.

Some paid-for services focus heavily on taking out a single loan to consolidate existing debts. But there are significant downsides. John Fairhurst, managing director of the free national debt advisory service Payplan, says: "The consolidation services often secure debts on property, putting the home at risk, and they tend to be less flexible than our approach if circumstances change.

"About half our clients had tried debt consolidation and weren't happy with it, because even if overall payments reduced a little they were often still unmanageable."

Even debt management companies that do not offer debt consolidation have significant fees. For example, Gregory Pennington, a company in Sale, Cheshire, charges 15 per cent of your revised monthly repayments, subject to a minimum of £25 and a maximum of £100. There is also an initial fee equal to one month's payment, refundable when you complete the programme.

Pennington works with debtors to establish what payments can be afforded each month, then negotiates with creditors to accept a lower monthly payment over a longer period and, where possible, to temporarily freeze interest and charges. This is broadly the same approach as that of organisations offering free advice.

The national charity Citizens Advice is unusual in providing free face-to-face appointments. Advisers at its 2,000 outlets can help fill out forms, write letters and even represent clients in court, but will not give product-specific recommendations. They normally begin by focusing on a debtors' income and expenditure. They may be able to increase income by taking up entitlements to State benefits and recovering unclaimed tax allowances, and they can advise on how to tackle expenses in order of priority. After working out an income and expenditure plan, advisers will try to negotiate more realistic payment schedules with creditors. In extreme cases, they may discuss bankruptcy and alternatives such as individual voluntary arrangements and administration orders.

Nick Lord, head of money issues at Citizens Advice, says: "There are always positive things people can do to improve their financial situation, but it's up to the individual take the initiative. A lot try to cope by muddling through and forgetting about it, but it doesn't work. We can help clients from all walks, regardless of whether they have high or low incomes. The most unlikely people can find themselves in serious debt if they experience a change in circumstances such as divorce, redundancy or illness."

Similar free face-to-face advice can be obtained from Advice UK, a charity which acts as an umbrella organisation to almost 1,000 advisory services in the UK, and National Debt- line, another charity, provides free advice over the phone.

National Debtline's advisers can talk through problems, provide a range of solutions and forward useful free self-help information. Although they will not negotiate directly with creditors they often refer callers to Citizens Advice or Advice UK.

They may also make referrals to Payplan or the Consumer Credit Counselling Service, which offer largely phone-based services but can negotiate with creditors for callers. Both organisations, which can also be approached directly, are funded by voluntary contributions from creditors and make no charge to users.

Debtconnect, launched in February, goes further than the others by aiming to reduce the amount you owe, as opposed to merely extending the repayment period. Although technically not free, it only charges you if it saves you money, taking 10 per cent of your monthly saving. An additional £100 initial administration fee is refundable if it cannot help.

The company, which claims it typically achieves debt reductions of 20 per cent to 80 per cent, is confident it can help more than 90 per cent of the clients it has seen so far. But it is so new it has no record to back this, and its debt settlement process can take from four to 18 months.

Peggy Herd, a 51-year-old secretary, who contacted Debtconnect in February, has been pleased with her results. Ms Herd, who is single and lives near Southampton, in Hampshire, had owed £32,500 to 11 creditors, and faced monthly interest bills of £1,177. By May, Debtconnect had nearly halved her debt and reduced her monthly payments to £414, even after taking its cut.

She says: "I had tried to forget about the problem, but when I saw Debtconnect advertise on TV I felt it was time to face the music. My outgoings have dropped by £750 a month and everything will be paid off in two years, compared to three years. They also gave me a lot of useful advice on curbing future expenditure."

Free debt-management services warn that people should be wary of any organisation that claims to be able to reduce the outstanding debt. But Debtconnect says it is ahead of the game as a result of learning from the US example.

Bobbie Brooke-Taylor, general manager of Debtconnect, says: "During initial meetings about forming the company even I thought the concept was too good to be true, but lenders write off a lot of debt because they prefer to get something rather than nothing. In the US debtors don't go in for loan centralisation or debt management, they go to debt settlement companies."

CHECKLIST

* A change of circumstances can put the most unlikely people in debt, so see your bank manager or a financial adviser if divorce, redundancy or illness look likely to cause financial problems.

* Trying to forget about debt does not work, nor does borrowing more to meet existing liabilities

* Debt consolidation can have significant downsides, such as increasing the overall payments, making your position even worse.

* Several organisations give free advice, and most will negotiate with creditors for a realistic repayment schedule.

* Creditors who write the nastiest letters are not necessarily the ones who should be paid first.

* Protect your home by getting up to date with mortgage or council tax payments. And be wary of debt consolidators who want to secure loans against your home: you may end up losing your home.

* Tell your creditors what you are doing about your debts. They are more likely to send the bailiffs round if you don't.

INFORMATION

* Citizens Advice. Check your phone book for your local office or visit www.citizensadvice.org.uk

* The National Debtline, call 0808 808 4000 or visit

www.nationaldebtline.co.uk

* Advice UK, call 020 7407 4070, or visit www.adviceuk.org.uk

* Consumer Credit Counselling Service, call 0800 138 1111, or visit www.cccs.co.uk

* Payplan, call 0800 716239 or visit www.payplan.com

* Debtconnect, call 0161 724 7691, or visit www.debtconect.com