Are debt businesses unfairly targeting vulnerable consumers?

Ever seen an ad urging you make a quick phone call in order to get debt free fast, so you can get on with living a stress-free life? Chances are it was an ad for a debt agreement.

Regulated by the Bankruptcy Act, debt agreements are one formal option for dealing with unmanageable debt. They typically involve a compromise with creditors on the total amount a debtor will have to repay, and establishes a timeframe for repayments.

Debt agreements can suit some people, particularly those with an asset such as a home that they want to protect, but is not appropriate for many Australians for whom other options—such as bankruptcy—may be the best decision. MoneyHelp’s website has more detailed information about the pros and cons of debt agreements.

Our concerns about the advertising and promotion of debt agreements are increasing—and with good reason.  A financial counsellor recently sought our assistance for a client who had a default judgment[1] entered against him in the Magistrates’ Court of Victoria for a debt.  A week after the judgment, the client attended a face to face financial counselling session with no fewer than 8 letters he had received in the post from debt agreement administrators, credit repair agencies, and other debt related businesses.

Those letters specifically referenced the judgment date and the creditor, indicating the contact was initiated because of the judgment.

Debt-stressed consumers are heavily reliant on representations made by debt agreement administrators.  The Australian Financial Security Authority (AFSA) has found they are the major source of advice for 88 per cent of people entering a debt agreement.  Only 2 per cent of those people nominated a financial counsellor as their main source of advice.[2]  Unlike debt agreement administrators, financial counsellors provide people with free advice about their best course of action—without the financial incentive to sell a product or service.

Accurate and honest advertising of debt agreements is therefore crucial to ensuring that consumers aren’t misled and prompted to enter into a debt agreement (or any other act of bankruptcy) without a full understanding of all their options and the associated consequences.

We suspect that this target group is particularly vulnerable to deceptive advertising claims that overstate the potential benefits of a debt agreement, and fail to mention other debt options that may in fact be in the client’s best interest. In May 2013 we published Fresh Start or False Hope, a report that looked at web claims made by debt agreement services. In our assessment, many debt agreement administrators were emphasising the benefits of debt agreements, while understating the consequences. Practically speaking, the consequences of entering a debt agreement can be very similar to bankruptcy.

In July 2014 Consumer Action wrote to AFSA about our concerns, including that the letters made various statements which were contrary to the guidance AFSA provides debt agreement administrators under Inspector-General Practice Guideline 1: Debt Agreement Administrators’ Guidelines Relating to Advertising. ASFA tells us that the debt agreement administrators in question have now withdrawn those particular advertisements from circulation.

Getting those dodgy ads we know about withdrawn is a good first step, but there are no doubt many others that we simply aren’t yet aware of.

What we’d like to know is why businesses, like debt agreement administrators and credit repair agencies that profit from people in severe financial distress, are allowed to harass and bombard judgment debtors at their most vulnerable time.

We know at least one business that sells court judgment information.  Court judgments are compiled and published in the ABR Credit Gazette by Australian Business Research, a Veda subsidiary. The Credit Gazette is a subscription service, distributed weekly; it states on the front page:

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The Information contained in this gazette is provided solely for making credit worthiness assessments and is not to be used for any other purpose. This gazette is solely to be used for your own purposes and not for use in or in connection with the provision of services by you to another person. Any use contrary to this will result in Veda ceasing to supply this gazette (emphasis added).

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As our recent case shows, specific information about judgments are used to make contact with debtors, in order to advertise fee-based services.  It is no doubt very useful for debt businesses to be able to buy the personal details—including specific information about at least one debt—of a group of people who constitute their target market.

And, it’s surprisingly cheap to buy this information—we understand the ABR Credit Gazette costs far less than $1000 a year to subscribe. It’s unclear whether this is the only publication of this kind available to fee-based debt services.  We consider that price to be a very small outlay for access to a very large ‘market’.  Our 2013 report ‘Like juggling 27 chainsaws’: Understanding the experience of default judgment debtors in Victoria’ estimated that 30,000 to 40,000 consumers receive default judgments against them in the Victorian Magistrates’ Court each year, often for relatively small debts.

So why is Veda facilitating marketing to vulnerable debtors by selling its Credit Gazette to businesses which apparently use it in breach of the terms of service? Credit reporting bodies like Veda are generally restricted by privacy legislation and the credit reporting code in the types of credit reporting information they can share.

And it’s not just debt agreement administrators that are problematic. Credit repair companies commonly charge for services that credit reporting agencies or ombudsman schemes provide free of charge. Credit repair agencies typically charge very high fees, as much as $1,000 to fix one credit default listing—and the fee is often payable even where the listing is not removed. We’ve seen consumers whose financial problems are worse, not better, after signing up for a credit repair service.   The main problem is that these businesses operate in a regulatory no man’s land, and so the enforcement mechanisms don’t yet exist. Consumers are left to pursue redress on a case by case basis through litigation or via external dispute resolution schemes, which can be lengthy and possibly costly.

It’s a source of frustration for consumer advocates, who see the problems these business models cause time and time again.

Perhaps it’s time for a new regulatory approach that has been implemented elsewhere—a stronger prohibition on unfair trading practices. Instead of playing regulatory catch up as these new predatory businesses that make a profit out of poverty and financial distress grow and prosper, the onus would be on businesses to make sure their products are safe and behaviour is fair to consumers.


[1] Default judgment is a court order imposed without a hearing against one party, usually the debtor being sued, because they failed to provide a defence to court action initiated by a creditor.

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