When your lifeline ties you down with even more debt

If you are up to your eyes in debt and panicking about being able to maintain your repayments to creditors, think twice before using a fee-charging debt management company to sort things out for you.

While adverts offering to substantially reduce your debt repayments to just one more affordable monthly payment can be very attractive, it's worth finding out first whether you can get the help you need from a free debt counselling service.

Agencies including local Citizens Advice Bureaux, National Debtline (0645-500-511) and the Consumer Credit Counselling Service (0800-138-1111) all offer free advice and help with renegotiating your debt repayments to credit organisations.

The 100 or more fee-charging debt management companies in the UK operate by negotiating with your credi tors, aiming to to reduce your monthly repayments by extending the term and/or eliminating interest charged on your borrowings. You then make one monthly payment which the company distributes, as agreed, between your various creditors. In return for this service, you pay commission of up to 25% which is incorporated into your monthly repayment.

But the debt management sector has recently come in for a lot of criticism from consumer groups, free counselling services and lenders who accuse some fee-charging companies of preying on vulnerable people, encouraging them to sign agreements that might not suit their needs, and not being open enough about how they operate and the fees they charge. The government's Debt Task Force, due to report in April on its wide-ranging examination of over-indebtedness, is keen to see tighter controls on this fast-growing and unregulated sector.

Sue Edwards, a social policy officer specialising in debt for the National Association of Citizens Advice Bureaux (Nacab) - a member of the Debt Task Force - says Nacab has several concerns about fee-charging debt management companies.

"Some don't properly explain the terms on which you are taken on as a client. They aren't up front about what they charge and they don't, for example, make clear that the first monthly payment you make is a deposit, repayable once you complete the agreement. This means that your payments to creditors are delayed until after the second monthly payment, sometimes even later. Meanwhile, interest and arrears charges are added, increasing your debts and getting you into worse trouble, and you are still getting hassled by letters and calls from creditors."

Nacab is also seeing evidence of some companies negotiating unrealistically high debt repayments for clients which often break down and of small companies setting up as debt managers and swiftly going bust, taking vulnerable people's money with them.

"In our experience, most fee-charging companies won't negotiate on priority debts such as mortgage and rent arrears and council tax debts, leaving people with little or no advice as to how to deal with them," Ms Edwards says.

"They don't, as we do, offer a holistic service that looks at the client's whole financial situation, not just their debts in isolation. We, for example, will make sure that clients are claiming all state benefits they are entitled to and that they deal first with priority debts which, otherwise, could result in their losing the roof over their heads or being taken to court."

Another worry is that some companies do not make it clear that when you renegotiate debts with creditors, whoever does it, you are defaulting on the terms of the original credit agreement. This fact is registered with credit reference agencies, blighting your credit record and making it difficult for your to get credit for several years afterwards.

Ms Edwards says: "The concern here is that people who can just about afford their debt repayments and don't actually need to reschedule their debts, are persuaded to sign up with debt management companies by adverts offering to substantially reduce their monthly repayments because they like the idea of having some extra cash. They don't realise the impact this will have on their ability to get credit in the future."

Nacab and other free counselling services do acknowledge, however, that lack of funding means they cannot compete with fee-charging companies in offering a 24-hour, seven-days-a-week service and a debt distribution service.

A spokesman for Baines & Ernst, the UK's largest debt management company which advertises on TV frequently, says: "Many thousands of our clients have come to Baines & Ernst after having failed to resolve their debt problems by using the services of free organisations such as CAB, CCCS and Money Advice Centres. Consumers are often aware of their options but find the services available from the free sector to be limited and unsatisfactory and instead turn to us for a comprehensive and professional service. The free sector means well, but its service is slow and can be at times extremely unhelpful."

To resolve the situation, Nacab wants to see regulation of the whole sector - free debt advice services included - through the current consumer credit licensing system overseen by the Office of Fair Trading. "We'd like to see a wider range of enforcement powers for the OFT including the ability to impose fines and force public apologies," Ms Edwards says.

The proposed regulatory structure would require companies to be transparent about their terms and conditions in their advertising, give clients fuller information on costs, services provided and penalties if they want to stop an agreement, and a cooling-off period.

Other critics and members of the Debt Task Force, such as the Finance Leasing Association which represents creditors, are in favour of self-regulation for the industry.

This would be welcomed by Baines & Ernst, which claims to adhere to a strict code of practice through its formation and membership of Alda - the Association of Licensed Debt Administrators. Among other things, this code requires terms and conditions to be clear and transparent, and for companies to make consumers aware of the implications of entering into debt management contracts.

At present, however, Alda has only two members. A spokesman for Baines & Ernst said: "Debt management companies provide an invaluable service to thousands of consumers who find them selves heavily in debt. Our average customer has a debt of over £19,000. When people find themselves in this much debt they need help.

"The vast majority of companies in the sector offer a professional service but we are aware of concerns about some isolated incidents. By forming Alda we have sent out a powerful signal that the industry will not tolerate sharp practices or consumer abuses. The Alda code of conduct is designed to stamp out any misconduct."

But Baines & Ernst is itself not without its critics. In response to complaints, the OFT is looking at a term in the company's contract which requires clients who want to end their contract to forfeit their deposit, to decide if this contravenes the Unfair Terms in Consumer Contract regulations.