Unscrupulous debt advisers set to prey on families facing Christmas crisis

There's plenty of free help for those who may struggle to control their finances in the new year.

H ard-up families could find themselves in the grip of a debt disaster by the new year, and unscrupulous fee-charging debt management firms will be waiting to make a mint from them. Debt charity Money Advice Trust warns that the number of people seeking help in January after an expensive Christmas will soar.

The nation's debt problems are stark. At the end of October we collectively owed £1.45 trillion, with average household debt standing at £57,623. That includes mortgages, but even stripping those out, each home in Britain owes £8,556. The interest payments on our debt were £65bn in the last 12 months. Meanwhile the average interest paid by each household on their total debt is approximately £2,580 each year.

The problems are forcing many to cut back on Christmas spending this year. According to the 2010 Omnibus Christmas Report by market research firm TNS, published this week, Britons will spend in total £1.2bn less on presents for friends and family this Christmas. However the average spend on presents will be £375 which, although down from £407 last year, could still be enough to force many families over the financial edge and into major debt worries.

In six of the last seven years, the number of calls recorded to the charity's free National Debtline phone service has almost doubled. In January this year it received more than 33,000 calls for help – compared to just 17,000 in December. In January 2009, which was around the peak of the financial crisis, National Debtline received an extra 20,000 calls compared to the previous month.

"Debt advice charities are repeatedly hit by a deluge of people seeking advice every January," says Joanna Elson, chief executive of the Money Advice Trust.

"We understand that people want to enjoy the Christmas period with their families, and are often tempted to put other concerns on hold until the new year. However debt won't wait, and the longer you leave it to grow the fewer options you have when it comes to sorting things out."

A growing menace for those facing a financial crisis is the rise of the fee-charging debt management firms.

Unlike the money charities, which give people help for free, debt management firms are in business to make money. They charge clients a fee (an average of £290), plus monthly charges of an average 17.5 per cent, according to free debt adviser Payplan. Payplan reckons that some 562,000 fee-charging plans will be set up this year, stinging struggling families cost consumers for £275m in upfront fees and charges.

"It is a fact that providers who charge fees can afford to spend large sums on advertising, and therefore attract high numbers of consumers," says John Fairhurst, managing director of Payplan. "When people are looking for debt help, they are often very stressed and will sign up with the first provider they come across. But this provider, although most visible, will not always be the one that will provide the best standards of care and service."

The Office of Fair Trading (OFT) this week highlighted an alarming trend by expensive fee-charging debt management firms: they potentially mislead people by masquerading as free debt advisers. The issue came to light after the OFT refused to allow debt management firm Baker Evans to use the trading names The Bankruptcy Helpline and The Insolvency Helpline. It said it refused to authorise the use of the names because they could mislead consumers into thinking they were dealing with an impartial, non-commercial or governmental organisations, rather than a commercial enterprise.

"Consumers must be able to distinguish commercial debt management companies from free charitable or government services," says Ray Watson, the OFT's director of consumer credit. "We will not agree to names that could mislead consumers into contacting companies when they might think that they are accessing free advice."

In September the OFT announced a review of debt management firms, and issued warnings to 129 of them for bad practices and not meeting the watchdog's standards. Firms were guilty of not negotiating with lenders to get interest frozen, or repayments lowered, and for using misleading advertising, the OFT said. The warning is clear: put yourself in the hands of a debt management company and you could soon be worse off. Based on a typical £20,000 debt, it would take someone almost two years longer, and the debtor would pay more than £1,500 extra, using a fee-charging company, compared to if they had got in touch with and used a non-fee charging organisation, according to Payplan.

Even better, don't let yourself get caught up in the seasonal celebrations and tip your finances over into the danger area. If you think your debt is spiralling out of control, the Money Advice Trust says it's essential you don't ignore the problem – the sooner you get advice about your debts, the easier it will be to deal with the situation. Then, when you seek out advice, make sure it's free (see below right).

Don't borrow money to pay off your debts without thinking things through. You could end up saddling yourself with further unmanageable costs and interest payments. If you are struggling with money, check that you are claiming all the benefits you can. Go to www.direct.-gov.uk, and look at the money, tax and benefits section. It's also worth visiting the charity site www.turn2us.org.uk for very helpful advice about the benefits and grants you may be eligible for. One of the key reasons to seek assistance is that a money adviser can help you construct a budget. That means making a list of your incomes and expenses and seeing where you may be able to make cutbacks. They can also help you decide on your best option for dealing with your debts.

If you decide to try and deal with the problem yourself, make sure you tackle priority debts first. Some are simply more important than others; for example, if you fall behind on your mortgage you could end up losing your home. The latest figures show that on average a home is repossessed every 15 minutes in Britain. Finally, bear in mind that you don't have to struggle on your own. Free, independent advice is available from a range of non-profit bodies.

Where can you get free debt advice?

* at any Citizens Advice Bureau

* by phone or online from the charities' National Debt Line (0808 808 4000: www.mymoneysteps.org) or Consumer Credit Counselling Service (0800 138 1111: www.cccs.co.uk)

* or from Payplan (0800 280 2816: www.payplan.com), which relies on donations from the credit industry.

'Getting National Debtline involved made the bank realise they couldn't bully me'

* When Santander sent in the debt collectors last year, Mikel Rogers turned to the National Debtline. "The situation with the bank had been going on for some time," says the 60-year-old who, with his partner Angie, runs a a support charity for families of drug addicts in Hornsea, East Yorkshire. "I thought I'd better get some proper legal advice. National Debtline put me in touch with some local legal advisers who took the weight of all the messing around away from me, and also made Santander realise they couldn't just bully me." Mikel's problems had started after he applied for a new car loan.The bank agreed the loan, and cancelled the standing order with which he was paying off an existing loan, then changed its mind about the new loan – but didn't reinstate the monthly payments. "It meant that without me realising it, I wasn't repaying my loan," Mikel says. The next thing he knew was the bank grabbing £540 – two months worth of repayments – out of his current account. "My relationship with Santander broke down. I took all my money out of the bank. The snotty letters and threatening phone calls from debt collectors became more frequent, which is when I got in touch with National Debtline," Mikel says. "Santander backed down, and asked me to pay the debt off at £1 a month. I worked out that would take 268 years, which made me laugh. But I agreed of course. I'm a reasonably confident person, but their activities would have frightened many others."