Family member resolving debts - are there any pitfalls?

February 6, 2012 7:49 PM

What are the implications of a family member receiving help to manage their debts from a charity?

A close family member and her family have been in significant debt, several tens of thousands, for years now. I and other family members have bailed them out pretty much constantly, mostly because they have small children, and I have taken on some of their debt myself. They have now booked a meeting with a charity helping with debts. This charity does the negotiation with all the creditors, and the debtor pays the charity an amount each month which they pass on to the debtors. I'm really pleased that my relatives are getting help, and I'm hoping too that it will decrease the financial drag on me. I realise the debt in my name will be unaffected and I'm ok with that and am paying it off slowly, but I'd be pleased to stop continuing to give them money directly. However I'm wondering what the implications of this sort of debt management are. I realise that it will bugger up their credit rating for at least six years and make it difficult or impossible for them to move. I also understand that they will need to switch to basic bank accounts so they will have no access to credit or, I think, to debit cards, so they won't be able to buy anything online, it'll be cash only. This is useful to know in advance so I can plan whether I will allow them to use my card in situations where it's cheaper to buy online, like school clothes through eBay.

Is there anything else I should know about the challenges there will be for them and people close to them in this process of getting themselves out of debt? I'd like to be as prepared as possible for anything that could go wrong or be unexpected.

Other relevant information - we are in England and both the adults involved have reasonably well-paid and secure jobs so once they're free of debt they should be able to avoid getting back into it.

posted by anonymous to work & money (10 answers total)

I'm in the U.S. so it may be different but nonprofits here that do debt consolidation and money management usually include a savings plan as part of their program, so since the adults involved are gainfully employed, they should have no cash-flow issues, and can get a *secured* credit card for things like buying school clothes online, and the secured credit card will also help them rebuild their credit. In those circumstances you shouldn't feel obligated to continue enabling them in any way shape or form from here on out.
posted by headnsouth at 7:58 PM on February 6

I don't know how it works in England, but I used one of these services when I was in my 20s to pay off some debt I'd carried since college and was starting to overwhelm me. I didn't have any such restriction on debit cards, and had a debit card tied to my checking account, which worked like cash anyway. The service negotiated much better interest rates for me than I could have done on my own, I made quick progress, and within a year I had the chance to apply for a secured credit card (one which you put money on deposit to cover). This allowed my to rebuild a credit rating and it has been OK ever since - no lasting ill effects.

There is counseling and advising associated with this process in the US, and I hope for your relatives too. When I went, I met with a counselor and worked out a monthly budget, and also got budgeting tips like putting money in an escrow account to pay for bigger expenses that came irregularly. They gave me a good education on how credit works and where the pitfalls were, all of which was sort of less well known and talked about in the 90s than now, so it was very helpful.

The tricky bit is to avoid getting back into debt. The adults here are going to need a good, honest, deep understanding of why they drove themselves so far into it and allowed other people to bail them out. When they are done with this program they should start their own program paying all of you back who have helped them. As hard as getting out of debt is, it's relatively easy compared to staying out of debt. They will need not just real changes of habit, but real changes of outlook and values, in order to avoid getting back into the same spot sometime in future. I know the children are a complicating factor, but you might think about not bailing them out any more in future - it does enable further debt accumulation.
posted by Miko at 8:11 PM on February 6

If it's a "charity" why are they paying them? Not being snarky; I genuinely don't understand.

In the U.S. most "non-profit" debt consolidation services are at least a partial scam. At best they negotiate lower interest rates with credit card companies. But the cardholder can do that himself, because the companies would rather get something than nothing.

Please make sure this is a legit charity and is actually doing something helpful they couldn't do on their own.
posted by drjimmy11 at 8:27 PM on February 6 [2 favorites]

Mine was a 501(c)3. I understand they are often reimbursed by credit card companies but regardless of the setup, mine was helpful. It's not true that I could have got better rates on my own, because I tried. That often works, but they can also simply sell your debt to collectors who are much less pleasant to deal with. These agencies can often get better rates because of their existing relationships with major lenders.
posted by Miko at 8:33 PM on February 6 [1 favorite]

so I can plan whether I will allow them to use my card in situations where it's cheaper to buy online

Isn't this completely against the whole logic of all their efforts to get their debt and bad financial habits under control?

Tell them to get a pre-paid card for online purchases. Having a pp card gives them the online purchasing ability without incurring new debt. I don't know the specifics of how it works in the UK, but it can't be that different than here in the US.
posted by lampshade at 10:34 PM on February 6

From the OP:

Responding via a mod to clarify. Yes, it's a legit charity - Christians Against Poverty. When I talked about the debtors paying them, I meant that they hand over an agreed amount of money each month, which the charity apportions to the creditors. I realise that theoretically the charity won't be doing anything the debtors couldn't do for themselves, such as negotiating with creditors and setting a budget, but my relatives have been unable to do this although we have tried to support them to do so.

Good idea re pre-payment cards.

Thanks for the advice and experiences, very useful, more welcome.

posted by taz at 12:46 AM on February 7

Yes, lampshade has it right about pre-paid cards for online purchases: personally I would not, for ANY reason, give ANYONE direct access to my own (credit OR debit) cards, and especially not to someone who has already proven they can't control their own income.

(If the pre-paid cards won't work for them for some reason, I'd suggest you use your card YOURSELF to do the required online shopping, with the understanding they would pay you back --- again, NOT giving them actual access to your cards.)
posted by easily confused at 2:02 AM on February 7

I can't tell from your description whether your relatives will declare bankruptcy, but your comment about having bad credit for 6 years fits. The Direct Gov page on bankruptcy is useful:

There are ways to manage your money during your bankruptcy, for example:

Basic bank accounts – no credit checks and no overdraft or other credit facilities
Prepaid debit or credit cards – no credit checks and you can only spend the money you load onto the card
Post Office 'Card Accounts' – only used for receiving benefits

The Citizen's Advice Bureau can offer you free impartial advice on this situation, as can the National Debt Line.
posted by ellieBOA at 4:14 AM on February 7

You should look at the debt board @ money saving expert. They know the answers to theae questions and are very supportive.
posted by plonkee at 4:52 AM on February 7

Part of my job involves giving debt advice in the UK (but IANYDA, etc). The details of how lenders weight credit scores is pretty much their own secret formula, but it's probable that missing contractual payments and going into default is what really hurts credit, and that has generally already happened by the time you get to the debt management plan stage. Please note, even paying off debts in full at this stage won't remove the defaults from the record. If CAP have set up regular monthly installments that are affordable and so aren't now going to be missed, that might not make a credit rating any worse, or even improve it, though I don't directly know how things are viewed from the lending end. There's a comparison of pros and cons of this sort of consolidation and other more formal debt options here (govt pdf).

Btw, it costs a statutory £2 to get a copy of your credit report from one of the three recognised agencies.

A bad credit record does not necessarily restrict you as severely as bankruptcy will when it comes to access to regular banking services. If you have not defaulted on a particular bank in the past, they may give you a regular current account despite poor credit. If it turns out your relatives are restricted to "basic banking", see the table in the centre of this leaflet on basic bank accounts, most of the "basic" accounts include both a debit card and direct debits.

If access to credit might be necessary in future (CAP may have an opinion on that, of course ...), maybe a Credit Union could be useful to join now. They aren't as popular in the UK as in the US, but if one is active in your area it may be worth looking in to. They can be a pain if you have to physically go to their nearest outlet to access your account, and they are really just commercial lenders like anyone else. However, they do seem to be willing to lend based on your previous good record as a saver with them, as opposed to your general credit record.

Apart from access to banking services, other people who may check credit, with potential negative consequences:
- future employers, especially in jobs involving finance;
- private sector landlords (they certainly often charge a fee for running background checks, whether they actually take much account of credit reports is another matter);
- even some utility companies might insist on prepayment schemes rather than a regular credit meter.
All that said, if you've not gone bankrupt, and don't have bad debts to the company concerned, the risk of being denied these services may not be huge. Certainly, many people with DMPs and lousy credit don't find it impossible to move around.
posted by wilko at 2:41 PM on February 7