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Benefit deductions risk pushing people
deeper into debt

September 14, 2017

The use of direct deductions from people’s benefits, by utility companies, housing providers, councils and others, to cover arrears payments is making it more difficult for families to pay for essentials and is forcing many to use credit to keep on top of bills.

This is according to new research released today, 'The problems of third party deductions', by StepChange Debt Charity1. The charity is warning that the introduction of Universal Credit and rules that will allow for greater amounts to be deducted from benefit payments risks exacerbating these problems.

What are third party deductions (TPD)?

The process known as ‘third party deductions’ (TPD) involves the Department for Work and Pensions (DWP) deducting a fixed amount from benefit payments to clear household arrears, most commonly housing costs, fuel costs, council tax, unpaid fines, and water and sewerage charges.

The amount deducted is paid directly to a creditor until the debt is cleared. At present the level of deduction is set by DWP at £3.70 per bill, per week. However under Universal Credit the amounts that can be deducted are significantly higher.

What are the effects of deductions?

Research conducted by StepChange Debt Charity highlights how TPDs can deepen existing financial problems. In a survey conducted with the charity’s clients, of those who had such deductions, 71% of respondents said that it had caused their family hardship, 40% reported falling behind on essential household costs and a quarter said they found it difficult to pay for food, clothing and heating.

Where cutting back spending was not viable, one in five of the charity’s clients with TPDs said they had to resort to credit in order to keep on top of essential bills.

A Freedom of Information request by the charity revealed the scale of TPD use, with 1.1m deductions occurring in a typical month. The practice was one familiar to the charity’s clients, with just over a quarter (26.5%) reporting they have had money deducted from benefits to go towards arrears, and those in a vulnerable2 position even more likely (28.6%) to be subject to the practice.

The charity is concerned that the higher amounts that can be deducted under Universal Credit will push those already in financial difficulty into further hardship. The charity’s modelling shows that for those with very tight budgets, the imposition of a TPD can leave a person without enough money to even cover their basic household bills, and that this is even more likely under Universal Credit.

The charity is also raising concerns that the existing process can also create perverse debt collection practices. Many creditors, including some who cannot get TPDs, use the DWP-set level of £3.70 per week as a minimum for arrears repayments outside of the TPD process. This is problematic and can lead to people repaying at a level that is not sustainable.

What needs to be done?

The charity recommends that deductions should be affordable for all, with the creation of a new minimum level of £1 deductions, and greater consideration by creditors to avoiding deductions at all when they are unaffordable or where the individual may be vulnerable.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said:

“Direct benefit deductions straddle the line between good and bad debt collection, offering a way of repaying debt and managing bills for many, while exacerbating problem debt for those who can least afford it.

“With the ongoing roll out of Universal Credit raising the amounts that can be deducted from benefits, the Department for Work and Pensions as well as creditors must take steps to ensure deductions do not worsen problem debt for the most vulnerable.

“Third party deductions should only be used when they are affordable and helpful to individuals, allowing them to keep up with essential bills. Regulators must provide guidance to firms on supporting vulnerable clients and steer them away from using deduction rates as a benchmark for debt collection.”

Notes to Editors

  1. All findings taken from Third party deductions briefing paper (StepChange Debt Charity – September 2017) full copies available on request
  2. Vulnerability in this context refers to one of the following: Difficulty with English language, visual impairment, hearing impairment, stress / anxiety, terminal illness, ongoing mental health condition, depression

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