CONSUMER legal advocates have raised concerns about emerging for-profit businesses targeting those on the brink of bankruptcy, warning that in many cases the fee-taking organisations were increasing the burden on those facing insolvency.

The Consumer Credit Legal Centre in Sydney argued that instead of reducing the number of bankruptcies, various for-profit providers may have the perverse effect of increasing the overall number of people pushed into bankruptcy.

In a submission to the Productivity Commission's review of consumer protection, it singled out service providers in three main areas: debt consolidators, debt agreement administrators and credit repair businesses.

The report says there are legitimate debt consolidation businesses available through mainstream lenders, essentially offering to refinance people's loans in one package at a lower overall interest rate.

But it adds: "There are businesses which target those in serious financial difficulty in order to gouge considerable profit while offering illusory benefits to consumers.

"These businesses take upfront fees that are large multiples of industry averages and place people in loans that they clearly cannot afford."

These businesses targeted consumers in danger of losing their home, at a time when they were ill-equipped to rationally evaluate a complex refinancing.

The report was also critical of the role of debt agreement administrators.

What are known as Part IX debt agreements allow heavily indebted people to come to a repayment agreement with their creditors through an administrator, although the effect on a person's credit record is the same as bankruptcy.

The centre raised concerns that the profit motive of administrators, who receive fees if someone chooses to make repayments under a Part IX agreement, was not necessarily leading to the right outcomes.

"Some CCLC clients do not appear to have even been insolvent at the point of entering a debt agreement," the centre said.

The centre raised the precedent in the United Kingdom in which regulators had expressed concerns that marketers of similar Individual Insolvency Agreements had contributed to a sharp spike in overall bankruptcies.

Finally, the centre argued so-called "credit repair" businesses, which offered to "repair" people's credit records, could only "repair" inaccuracies in a report and otherwise would be breaking the law.

"Business ventures which are designed to make money from the plight of consumers whose main problem is that they don't have enough money [are] essentially flawed," the submission stated.

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