It has been a long and never-ending week of disappearance for controversial payday lender Wonga.
News that the company was lining up potential directors as it crumbled under the weight of legacy loan applications came last weekend, but it wasn’t until tonight, hours after the lender. stopped offering new loans, that these directors were finally summoned.
Wonga’s failure sparked rapturous tiny violin jokes on Twitter as well as genuine concern that more borrowers could be forced into the clutches of loan sharks if a major legitimate credit provider goes bankrupt.
For those who are paying off debts to the business, there is another question: what will happen to their loans?
With market conditions causing major changes on our streets and within financial services, this is an important question for anyone holding credit or paying off debt to a business.
What happens when a loan company goes bankrupt?
Wonga’s collapse does not mean that its debtors will be able to waive their repayments.
The directors of the company will take over the management of the company, although this does not mean that they will grant new loans. The existing loan “book” – details of who owes the business, how much, and at what interest rate – will be sold to a new creditor and borrowers will have the same responsibility to repay them.
It may sound disturbing: We all know stories of debts being sold to companies that use aggressive tactics and send debt collectors to pressure people to make repayments faster.
However, there is actually a lot of protection for borrowers in these circumstances.
The StepChange charity says borrowers’ rights cannot be changed just because a debt has been sold. The buyer must follow the same rules as the original creditor, so if borrowers continue to make their repayments on time, nothing will change except the name of the company they are repaying.
Wonga customers are therefore unlikely to notice a difference and are protected against any changes to the terms and conditions.
Overdue debts are often sold to companies that specialize in pursuing overdue repayments, which means that the demand for payment increases accordingly. These companies buy a portfolio of overdue debt for less than its face value and then sue the debt – making a profit if they manage to get a full repayment.
However, they cannot increase interest rates or add charges to debt unless agreed to in the original credit agreement. And it is not in their best interests to lead a borrower to insolvency, so it is usually possible to make new arrangements to pay with him.
So the rights don’t change and Wonga’s customers will just start paying off a new creditor.
However, anyone who accumulates arrears, whether on a loan or for services such as household bills, can have their debts sold to debt buyers. And while their rights would not change, the efficiency with which their debt is prosecuted might.
What if i have credit and a business goes bankrupt?
For debtors, the amount they owe a business is one of its assets that can be sold. For creditors, it’s slightly different.
With banks, building societies or credit unions, a good level of protection is in place. If one of them goes bankrupt, the Financial Services Compensation Scheme offers protection up to a maximum of £ 85,000.
For joint accounts, the available protection doubles. For savers with even larger sums, they can split their money across multiple bank groups to get the same protection on each account, although this is only if they split your money across multiple bank groups, not branded. Some groups have multiple brands, so it’s important to check.
But what about those people who are creditors of a business? Maybe they paid for an order that wasn’t delivered, or they keep a balance in their account and make one-time purchases, like from a wine club.
In these situations, it can be much more difficult to collect what is owed and there is no guarantee. The first step is to submit a complaint to the administrator describing the money that is owed and for what, the Which? warns that if creditors do not act, they will not be reimbursed.
Another option may be to make a claim against the card provider used. Customers who made a purchase or even part of the purchase with a credit card may request a refund from their card provider.
Who? explains: ‘For example, if you ordered a new sofa from a furniture store, paid a deposit of £ 500 with your credit card, then paid the balance of £ 1000 by check, you would be covered for the full 1 £ 500 if the business goes bankrupt and you haven’t received your sofa.
If a customer has made full payment using a debit card, they need to act quickly when the business they paid goes bankrupt. If they act within 120 days, they may be able to claim their money back through chargebacks, although this is not written into law and therefore fees may vary.
A very common form of credit balance when a business goes bankrupt is the gift certificate. It is common for these to be refused as soon as a company goes into receivership, even if its stores remain open.
Gift certificate holders may not feel like creditors, but they are, and that means they need to align with other creditors such as the Inland Revenue, homeowners, and loan companies – and they will not be given priority.
What if I am a lender?
It is increasingly common for savers to become lenders themselves using a peer-to-peer lending platform. This can muddy the waters, as it looks like a savings account, but it isn’t, which means bad debt could sink an investment, with no protection plan to appeal to.
Many peer-to-peer platforms offer provident funds that can be paid if a borrower defaults, but there are no hard and fast rules as it varies from website to website. This means that it is essential that potential lenders check what protection is available before committing their money.