Don't lose out when businesses die!
We explain how to avoid losing out when companies crash and firms fold.
In England and Wales last year, 4,792 companies were placed into compulsory liquidation, while another 11,253 firms went into creditors' voluntary liquidation. In total, 16,045 companies went bust in 2010 in England and Wales alone.
Adding in a further 19,077 company failures in 2009 and 15,535 more in 2008 gives us a total of 50,657 companies going bust in just three years.
Protect yourself from collapsing companies
With around 1,400 companies going bust each month, it's vital to take steps to protect your money when buying goods and services. Otherwise, if you don't take care, then a firm could fold and take down your money with it.
Of course, it's not only small businesses that go to the wall when the economy is struggling. In the financial meltdown of 2007/09, the credit crunch and recession killed off many famous firms. For example, 99-year-old high-street icon Woolworths bit the dust in November 2008, music chain Zavvi followed in December 2008, and bookseller Borders went under in November 2009.
What rights do you have when companies crash? What can you do to make sure you don't lose out?
Related how-to guide
Whoever you want to complain to, make sure you follow these tips.See the guide
Put simply, how you pay governs what protection you have...
Section 75: your flexible friend
For many years, I've been loading all of my spending onto my credit card. One reason I do this is to earn 1% cashback on all my spending, which can exceed £10 a month in 'free' money. But I also use my credit card because I know that my flexible friend offers valuable protection when problems arise.
This is because spending on credit cards is governed by Section 75 of the Consumer Credit Act 1974. Section 75 governs what are known as debtor-creditor-supplier relationships, in which you're the debtor (borrower), the card issuer is the creditor (lender) and the retailer is the supplier.
In these relationships, the card issuer "stands in the retailer's shoes." In other words, if the retailer doesn't deliver on its promises, then the card issuer is jointly liable. However, this protection applies only to goods costing between £100 and £30,000 where full payment -- or a deposit of any size -- has been made using a credit card or other credit agreement (such as a store card or retail finance).
Thus, if goods don't turn up or aren't as described, of satisfactory quality and fit for purpose, then your card issuer is equally liable for this breach of contract. To get your money back, you need to make a complaint to your card company in writing and await your refund.
This protection lasts for six years from the breach of contract, not from the date of sale (five years in Scotland). If your card issuer refuses your refund, then ask for a 'deadlock' letter with which to approach the free, independent Financial Ombudsman Service (FOS).
Paying by debit card
The protection afforded by Section 75 is available only when paying by credit card and not by debit card. On the other hand, if you pay using a Visa debit card (or a Visa credit card for goods costing under £100), then you can rely on another safety-net known as 'Visa Chargeback'.
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With Chargeback, your card issuer reclaims the money from the supplier's bank, so it isn't affected by retailers going bust. Also, Chargeback covers items costing under £100, so it's a useful back-up.
To make a Chargeback claim, simply write to your Visa card issuer within 120 days of the breach of contract, explaining the breach and asking for a Chargeback refund. Again, the FOS will help if your card issuer drags its feet for longer than eight weeks.
Paying by cash, cheque or vouchers
If you pay for something using cash, cheque or vouchers, there's very little you can do if a company crashes or your goods aren't as expected.
When companies collapse, there is a strict pecking order for payouts. First are secured creditors, which are lenders owed money secured against property or other assets. Next is the insolvency practitioner hired to wind down the company. After these come employees, the taxman, unsecured creditors and customers, including you. Hence, you're at the end of a long queue and are unlikely to get a penny.
You may get lucky and find your goods labelled with your name in the company's warehouse, ready for shipping, making you their registered owner. However, this is fairly unlikely and thus offers faint hope. If you have a warranty governing a faulty product, then you may have a claim under the manufacturer's warranty.
When travel firms tumble
Most travel insurance policies won't pay out if your holiday company goes bust before you head off on vacation. Those that do usually cover only the failure of scheduled flights to deliver you to your destination.
Even so, you have special rights if a holiday firm, tour operator or airline goes bust and leaves you in the lurch. A law known as the Package Travel, Package Holidays and Package Tours Regulations 1992 forces all package holidays to be bonded.
Most flights and package holidays including flights are bonded with ATOL, the Air Travel Organisers' Licence. If your tour operator or holiday company goes under, ATOL will refund your money, or pay for you to return home if you've already left.
However, some holidays aren't bonded by ATOL, including:
- when you book directly with an airline, rather than through a travel agent or tour operator;
- when you buy a ticket for a scheduled flight and get your ticket there and then;
- DIY holidays (where you book flights, accommodation, transfers and car hire separately); and
- most holidays booked overseas.
It's easy to check whether a travel agent or tour operator is ATOL bonded -- the ATOL logo and individual ATOL licence number should be displayed in shops, websites and brochures.
When financial firms flop
Insurance policies, pension plans and many other financial products are protected by a government-backed safety net known as the Financial Services Compensation Scheme (FSCS). If a company regulated by the Financial Services Authority goes bust, then the FSCS steps in to bail out investors and policyholders.
How much you receive depends on what you own.
For example, the payout to depositors when banks and building societies go bust is limited to a maximum of £85,000 per individual per institution. Thus, a couple can have up to £170,000 in a joint account while still enjoying the full protection of the FSCS.
For investments, this upper limit is £50,000 per person per firm; for insurance policies, it is 90% of the claim with no upper limit.