A new firm says it can help people who are unable to repay their debts, writes Laura Slattery

Debt can sneak up on people. What starts off as some harmless credit needed to fill a hole in their finances stretches out into a festering loan that eats into day-to-day budgets and breeds more and more borrowings.

A change in circumstances - relationship breakdown, illness, redundancy, bereavement or a baby - can lead to missed payments, which in turn add penalty fees and a damaged credit rating to their woes.

The Money Advice and Budgeting Service (Mabs) says it finds a higher influx of new clients coming through the doors of its national network of offices in the early months of the year.

"It is late January and February that we see an increase, because that is when people's utility bills begin to have an impact and they have to start repaying any credit amassed over the Christmas period," says Michael Culloty, a national development officer and spokesman for Mabs.

About 60 per cent of Mabs clients are social welfare recipients, but - perhaps as a result of Ireland's increasingly familiar relationship with debt - the service is now attracting a greater proportion of employed and middle-class people. Mabs had more than 11,500 new clients in 2006.

As its website notes, being in debt can be a difficult, lonely and desperate place to be. But apart from the emotional support provided by the service's non-judgmental staff, what people who are in serious debt most need is practical information on how to get out of it.

"We would advise people who are capable of looking after themselves to follow our four-step approach to dealing with debt," says Culloty.

This involves listing and evaluating priority debts, making contact with creditors to ensure they know you are attempting to resolve your financial difficulties, writing up a budget and making an offer to each creditor.

Mabs will negotiate with creditors on behalf of people who are too stressed out or ill to do it themselves or who have literacy or numeracy difficulties. Helping people set a realistic budget that cuts out unnecessary expenditure and ensuring they are claiming all of their entitlements is also part of this process - "a budget that they can live with", is how Culloty describes it.

Mabs is an independent service funded by the Department of Social and Family Affairs.

But countries with longer histories of consumer credit availability, such as Britain, are crawling with hundreds of separate credit management and debt counselling services. Some are charitable organisations, others commercially run.

Now an Irish solicitor has set up Debtfree.ie, a company that says it can help people with more than €40,000 in debt who cannot afford to make their repayments.

Debtfree.ie says it can use the Bankruptcy Act 1988 to reduce the amount of money the person must pay their creditors and extend the time they have to make their settlement. Debtfree.ie will "act as honest broker between you and your creditors".

Barry Lyons, the practising solicitor behind the company, says the idea is to give people - such as self-employed individuals who have guaranteed company debt or sole traders who fall into trouble with creditors - access to the kind of solutions available to companies under liquidation laws.

Debtfree.ie will negotiate with banks, the Revenue Commissioners and trade creditors on behalf of such people when they cannot meet their liabilities.

The company doesn't charge the debtor for its services but instead takes a cut of whatever settlement the person makes with their creditors, persuading them that dealing with Debtfree.ie is their most realistic chance of getting any money at all.

Creditors are not exactly happy to get the Debtfree call. "It's not the pink and fluffy side to it," says Lyons. But quite often the person in debt has also been on the receiving end of broken promises, says Lyons, who gives the example of a plumber who spends money on materials and takes on staff for a project only to find that the big developer that hired his services has pulled out of the deal and won't cough up.

He hasn't seen too many examples of people who rushed out to buy a wardrobe full of Manolo Blahnik shoes once the Celtic Tiger hit.

Unlike the Mabs service, Debtfree.ie is really aimed at people who have at least some assets, but in some cases this will boil down to just the family home. "A partial equity release might kick-start a repayment process," he says.

Debt consolidation - where all or some of a person's loans are rolled into one loan secured on a property - is often suggested as a way for people to reduce the total value of their regular loan repayments and, as Debtfree.ie puts it, give them "the breathing room" they require from the creditors.

The hidden downside, as Lyons points out, is that the borrower ends up paying more back in interest to the lender, because the short-term debts have been extended out over a longer term.

Debtfree.ie proposes organising an "informal" scheme of arrangement or a debt management programme where it will negotiate with creditors on behalf of the person in debt - along the lines of the Mabs approach. This could include a lump sum that the debtor has acquired by refinancing their home, followed by stage payments for each creditor.

But it is the company's third solution that is regarded as unusual by one expert in the area. Under a formal scheme of arrangement, a debtor seeks the approval of 60 per cent of his or her creditors on a repayment scheme and issues a petition for the protection of the court. This includes an affidavit setting out the reasons for the financial difficulties.

If the court approves the arrangements, they become binding on all of the creditors, who cannot then sue the debtor for recovery of the money.

But if this approval is not obtained or if the application to the court is unsuccessful, the person will be adjudicated bankrupt. It can take 12 years to be discharged from bankruptcy.

It is this outcome that worries Paul Joyce, a researcher at the Free Legal Advice Centres (Flac) who specialises in consumer debt law. Very few formal schemes of arrangement have been put in place under the Bankruptcy Act 1988, according to Joyce.

"I wouldn't be rushing into it," he says. "It may be a solution for someone who feels they may be subject to legal proceedings quite quickly and wants to stop it before the whole house of cards comes tumbling down. But you would need to have a fairly good idea that your proposal will be accepted, which is presumably why people don't do it,"

Although Debtfree.ie lists the fact that, unlike a bankruptcy, a formal scheme of arrangement won't be published in newspapers, the Act does say that such schemes can be published in a trade journal.

"The effect that a formal arrangement would have on a person's credit rating is also open to question," says Joyce, who considers the name "Debtfree" to be misleading.

It is a remedy that should be used cautiously, Lyons admits. But it is not in a creditor's interest to make a debtor bankrupt, he adds.

For its part, Mabs believes consumers should be wary of where they get advice on solving their debt difficulties. "We would advise people to think long and hard about loan consolidation and approaching any debt management company that has a profit motive," says Culloty. "People should have independent advice."

For more information on how to deal with debt, visit www.mabs.ie or check the telephone directory for a list of local offices.