How does a client rack up $250,000 in personal debt?

by John Dickinson, director of DebtX Mediation Services

We recently helped a client who had over $250,000 in personal loans and credit card debt, spread across 12 credit providers. Most of it was in arrears and recovery action had commenced on several of the accounts.

Having been involved with people’s finances for years, I thought I had seen some big debt ­– but this took the cake for personal debt.

The first thing I thought was, “How is this possible? How can a person who earns a modest income and has few assets qualify for this level of debt?”

After some investigation, it was clear that this person had run out of capacity before even half this debt was acquired. Some of the debts were already showing signs of distress when further credit was approved.

I did not immediately jump to the conclusion that all the lenders had acted irresponsibly. After all, not all borrowers are entirely truthful when applying for finance, so I approached this matter with an open mind.

After reviewing a mountain of documentation, one thing became clear: Our client had not misrepresented their position when applying for these loans.

But there was a lack of information, mainly because many of the creditors hadn’t asked for it. With some of the loan increases, some very basic questions, such as, “What is your current income and expenses?” seemed to be missing from the application. Instead, there were many emails and letters inviting the client to increase their limit with very few questions pertaining to their current financial position. One account limit grew from $5,000 to over $45,000, with every increase being unsolicited.

Even if rudimentary checks had been made, it would have been obvious that more credit was not in the client’s best interests – nor in the creditors’.

There’s a mountain of legislation that covers what is expected of a credit provider with regard to consumer credit; much of this is centred around acting in an ethical and responsible manner, and gathering and validating information to determine capacity and benefit.

This excerpt from the Banking Code of Practice sums it up:

“Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.”

It’s fair to say that the Banking Code of Practice must have been missing in action when some of these creditors accessed and approved these facilities.

I’m not saying the client is entirely without blame; after all, he did borrow and spend the money. However, surely the creditors are partly responsible.

We all know that desperate people often do desperate things, and, in this case, throwing money at a client who could not afford it only had one possible, devastating, outcome.

These days, when a person applies for a home loan, they are asked numerous questions and need to provide endless documentation. If the application is anything less than perfect, they will most likely be declined. But if that same person applied for a credit card, do you think the application would be met with the same level of scrutiny?

There’s no doubt lending has tightened up significantly recently and securing credits card and personal loans is not as easy as it once was. While I would not want to see the pendulum swing to a point where qualified applicants struggle to secure finance, throwing mountains of high interest credit at people who can’t afford it is a recipe for disaster.

Let’s hope we see fewer extreme cases like this one and creditors are able to implement effective methods to ensure the funds they are advancing are not only in their interests, but their clients’ interests also.