The number of Australians in financial distress is rising, according to counsellors who are left trying to save those in trouble.
Financial Counselling Australia (FCA) says there are now 2.5 million Australians facing financial difficulty.
The organisation has told the ABC’s 7.30 program a huge new industry is emerging seeking to profit from these people.
There is big money to be made by such entrepreneurs, leaving many to question the ethics of their business model.
Early last year, ads for a debt management service called MyBudget caught the attention of Krystal Laffin in Renmark, South Australia.
A single mother-of-two, at the time she was struggling with repayments and at her wit’s end.
“I had people on my doorstep ready to take my car away and my home loan was in default,” Ms Laffin said.
“That’s what drew me towards MyBudget, I was trying to handle it by myself plus handle two jobs and all. So I just thought, why not give it a try?”
MyBudget has made its founder Tammy May rich. She was named Telstra’s South Australian businesswoman of the year and BRW estimates her personal wealth at $20 million.
She offers to help those in financial distress by managing their income and debt repayments.
The company deducts what Ms May describes as “small fees”: an admin fee of around $2,000 a year, plus a significant establishment fee.
“It can be anything from $600 to $1,500,” Ms May told 7.30.
“We don’t have clients come to us and say they feel as though our fees are hindering them financially. In fact a lot of the time people are telling us, clients are telling us they don’t even recognise the fees.”
Financial counsellors concerned about high costs
There is, however, somewhere else for people struggling with crippling debt to go.
Australia’s network of financial counsellors provides help for free, with support from charities, churches and governments.
There is strong concern amongst the counsellors about commercial debt management services like MyBudget and other credit repair agencies.
“We are really worried about for-profit providers targeting people in financial difficulty who only offer one solution,” said Fiona Guthrie, executive director of FCA.
“That’s a solution that involves high fees, high set-up costs, ongoing fees. It’s hugely expanding.”
Lawyer Alexandra Kelly of the Consumer Credit Legal Centre in New South Wales agrees.
“They always prioritise payment to themselves first and payments to creditors are basically left to be fought amongst the creditors,” she said.
“I think there’s a great deal of self-interest in these organisations and they are in effect profiteering off people’s hardship.”
When asked if this was true, Ms May said: “I know what we do improves our clients financial position.
“The amount of clients that I hear tell me that MyBudget has saved their life. Improved their financial position, let alone saved their marriage, is so encouraging.”
Customers say they were left worse off
Ms Laffin, however, says she had a different experience.
“The first couple of weeks were OK. Then things started getting defaulted without telling me,” she explained.
“I wasn’t being told about payments not being made. It just got such a big mess.
“I couldn’t open my letters, I couldn’t even answer the phone. I didn’t even want to leave my house. I ended up getting mentally ill because of it.
“MyBudget was still demanding their fees when I was in a mental hospital.”
In desperation, Ms Laffin sought help from the Salvation Army and financial counsellor Nicole Barber.
“She had defaulted on her HomeStart loan, she had also defaulted on her car payments, that was up for repossession. She had lost her insurance for both the car and the home, which were under finance,” Ms Barber said.
“She had been disconnected from her phone. She had credit card debts and she was just in tears.”
In Queensland’s Hervey Bay, John Woodward and his family were also attracted by MyBudget’s ads.
“They basically turned around and said, ‘You won’t have to worry about any of this any more. We’ll look after it. It’ll be fantastic’,” Mr Woodward said.
Like Ms Laffin, MyBudget’s service fees were deducted, but Mr Woodward says the company neglected to negotiate with or pay key creditors.
The Woodwards soon got a frightening call from the bank.
“I got a phone call from them saying, ‘What’s going on? And I’m in shock, I say, ‘Haven’t you been talking to MyBudget? Is MyBudget not been contacting you about what’s been going on?’
“And he’s going, ‘No, I haven’t heard anything, we haven’t received any money. They haven’t even contacted us’. And I was flabbergasted.”
The Woodwards’ house had to be sold at a fire-sale price and a big loss.
“Their care factor – they have none,” Mr Woodward said, referring to MyBudget.
“I broke down at work. Collapsed at work. I split up with my wife for about a month. Things went pretty bad.”
MyBudget ‘growing at more than 50 per cent per annum’
Referring to such cases, Ms Guthrie said: “If you are in financial difficulty the last thing that should happen to you is, you go to one of these services you end up worse off and owing more money, and we unfortunately see that happening to people.”
Asked if it was true that MyBudget ensured it got paid when its clients’ creditors often didn’t – and if victims could end up worse off, Ms May replied: “We’ve helped over 30,000 Australians countrywide and if that was the case we wouldn’t have a very good business.
“We wouldn’t have clients coming to us month on month and have this growing business, that’s growing at more than 50 per cent per annum.”
FCA wants government and regulators to introduce tougher regulations on commercial debt services.
“These services are growing. We are seeing more problems from these services when they don’t work,” Ms Guthrie said.
“I think the case for regulation is increasingly strong. So if something goes wrong people will have access to external dispute resolution and potentially a mechanism for compensation.”
Former customers like Mr Woodward and Ms Laffin want even stronger action taken.
“My Budget – I want them closed down,” Ms Laffin said. Mr Woodwards agrees.
“I really believe they should be made liable for what they’ve done. And be stopped,” he said.
Asked about the concern that people can be drawn in to debt services by big promises before fees are charged, Ms May replied: “That’s absolutely not the case at all because we make sure our fees are affordable for our clients.
“The other thing is they’re not locked in to a long-term contract so they can give us 30 days’ notice and actually leave us if the service isn’t working.”
However, the FCA’s Ms Guthrie argues that if you are on a low income struggling with debt, or even a high income struggling with debt, paying for someone to manage the debt does not make sense.
Instead, she advises that those in financial distress should first call a free independent financial counsellor.
If you are facing financial problems, you can contact Financial Counselling Australia on 1800 007 007 from anywhere in Australia to talk through your options.