When Carole, a full-time nurse in Glasgow, found herself in credit card debt and unable to meet even the minimum repayments, she was, in one way, fortunate.
Following an appointment with a debt adviser, Carole decided that the security and protection offered by a debt payment programme was the best option. This enables Carole to repay her debts over an agreed period, based on a fair assessment of what she can afford. She won’t face escalating interest or penalty charges and the Scottish legal protection provided by the scheme means she does not have to worry about creditors harassing her for payment.
But if Carole had lived in England or Wales, where agreements between debtors and credits do not offer the same protection, things would have been very different. Under Welsh or English debt management plans, creditors are under no obligation to provide breathing space, or to freeze interest or charges while the debtor is making repayments.
In England and Wales, each time a creditor refuses to give breathing space, a carefully balanced debt plan can instantly become unaffordable. This often means the person who owes money has little incentive to seek help before their problems get out of hand; they get statutory protections only after they become unable to pay back and are forced to enter an insolvency option.
The Financial Inclusion Commission, of which I am a member, wants to see the UK government set up a new debt support programme for England and Wales, based on the Scottish debt arrangement scheme, as part of our request for measures to empower struggling families and individuals who want to help themselves out of problem debt.
The Scottish scheme provides debtors with legal protection from their creditors while they get help with their debts – and this protection continues if they go on to use a formal debt payment programme. These programmes are legally binding formal agreements between debtors, creditors and debt arrangement scheme advisers. It offers something which is lacking at present in England and Wales – a sustainable solution that offers protection for vulnerable people in debt.
Our proposal for England and Wales
The Financial Inclusion Commission’s proposal builds on our 2015 report,Financial Inclusion: Improving the Financial Health of the Nation, and we are also calling on the government to bring forward primary legislation to establish this new approach in the next session of parliament.
At a minimum, a debt support programme in England and Wales should include the following:
- Enforceable breathing space from interest, charges and creditor action from six weeks up to one year.
- Frozen interests and charges, and a continuing freeze on creditor action, during the whole repayment process, to be written off altogether if the debtor completes the payment plan.
- Flexibility for the debtor, in the form of payment holidays a maximum of once per year, and variations to the payment plan should their circumstances require it.
- A single regular payment that is then distributed across creditors proportionally to the total liability owed to them.
- Integrated money advice as part of the repayment process, to help tackle underlying issues. The structure of this advice should be informed by existing evidence on financial advice to ensure debtors are given the best possible support.
- A common financial tool to be used to establish the circumstances of all debtors before putting together a payment plan.
A programme like this could have a range of positive consequences. For those in debt, it will mean stronger protections and support to help them tackle their financial problems. For many lenders, it will mean seeing a greater proportion of debts repaid in cases where they would otherwise have received very little, if anything. For the country’s broader economy, this can help to reduce worrying levels of household debt, currently threatening economic stability.
Reports suggest that 8.8 million people face debt problems in the UK, owing a staggering total of £1.43tn. Unmanageable debts are mainly caused by life-changing events such as a bereavement, long-term illness or loss of employment. It can impact people who have worked hard and have managed their finances responsibly all their lives, but find themselves in difficultly due to events out of their control.
Having mechanisms in place to protect those facing debt issues is vital if we are to achieve true financial inclusion in the UK. It is never a bad time to pass a good law.
This article was first published on the Guardian Public Leaders Network as part of their Tackling Financial Exclusion series