Major gap in protections for people in debt

10th December 2014

There is a major gap in the protections available to people struggling with debt, according to new findings from StepChange Debt Charity.

The charity says that a patchwork of protections and voluntary schemes leaves millions of people in temporary financial difficulty at risk of falling deeper into debt, and is calling for the creation of a new debt help scheme to address this protection gap.

There is currently no consistent approach by creditors to helping people in temporary financial difficulty. The charity’s research shows that, when individuals ask for assistance they often receive no support and in many cases take on further borrowing, including payday loans, to pay back existing debts, leading to a deepening spiral of debt.

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

“The kind of problem debt which we see every day places a heavy burden, not just on individuals and their families, but on wider society.  People in problem debt who do the right thing and take action to get back on their feet deserve support but many miss out on the help they need. With millions of households’ finances on the edge we need to give people time and space to recover if they get into difficulty.

“Now is the time for government, creditors, regulators and the debt advice sector to come together to make this scheme a reality”.

The protection gap

Under current law in England, Wales and Northern Ireland, statutory protections guaranteeing indebted people protections such as a freeze on interest and charges and a halt on enforcement action only go to those who choose the serious step of becoming insolvent.

Analysis of the charity’s clients shows that in 2013, insolvency was the best option for just 22 percent of the 280,000 people it advised. Leaving the remaining 78 percent potentially exposed to a patchwork of protections and voluntary schemes offered by creditors, which the charity’s evidence shows don’t always deliver adequate help.

Protection from additional interest and charges and halting enforcement action is crucial to giving people time to recover, but there is no guarantee that the millions of people who may need such support will receive it. The charity estimates that there are 3m households in the UK currently using credit to keep up with existing credit repayments ^[1].

A patchwork of protections

The charity’s research shows that when people in financial difficulty who want to tackle their debts reach out to their creditors, assistance is often not forthcoming. Nearly 80 percent of clients surveyed by the charity said that they had contacted at least one of their creditors before seeking debt advice, and of those people:

• 32 percent of clients said that none of their creditors offered to help by freezing interest and charges or halting enforcement action;
• 33 percent said that none of their utility providers offered any assistance
• 38 percent said their landlord offered no support;
• 50 percent with Council Tax arrears said their Council failed to help.

These findings highlight the problems caused by the current mixture of voluntary schemes and protections. For example, while some creditors are governed by a statutory regulator such as the Financial Conduct Authority (FCA) which makes rules and guidance for consumer credit businesses to treat customers fairly, there are little to no protections to help people in private rented accommodation pay back arrears in affordable instalments.

When support is not forthcoming

When creditors do not offer to freeze interest and charges or stop enforcement actions, people regularly fall back on coping strategies such as juggling payments and taking on further debt, including payday loans or other high cost short term credit.  A survey of StepChange Debt Charity clients highlights the negative outcomes when such support is not offered:

• 60 percent went on to take on more debt to try and cope with their financial problems;
• 21 percent took out a payday loan;
• 29 percent said that the pressure applied led them to pay that bill and fall behind on others, which is sometimes not a rational strategy,

The emotional and financial cost

Failing to positively intervene to help people with debt problems can leave a legacy of emotional harm and deeper financial detriment. There is a long-established link between debt and mental health problems and the charity’s research shows clear evidence of the distress that debt can cause ^[2]:

• 74 percent of the charity’s clients say that debt affected their sleeping patterns;
• 64 percent reported mood swings that affected their behaviour;
• 43 percent said they were unable to concentrate at work.

With household budgets squeezed and millions of people at risk of falling into temporary financial difficulty, the financial damage of a lack of assistance is clear. StepChange Debt Charity estimates that in six months someone falling behind on bills and commitments would be a further £2,300 deeper in debt through additional interest and charges alone if they did not receive some form of assistance.

Problem debt also imposes substantial costs on society, previous research by the charity showed that problem debt costs the UK £8.3bn^[3] .

An “extended breathing space” scheme

The charity is proposing a new “extended breathing space” scheme in which the statutory protections are extended to people with temporary financial difficulties. These protections will ensure that short-term economic problems, that may be caused by job loss, illness or other life events, do not spiral into long term difficulties. These protections are:

• A freeze on additional interest and charges;
• An immediate stop on enforcement actions;
• A period in which people repay only what they can, with no minimum payments required.

Notes to editors:

1. Life on the Edge a report by StepChange Debt Charity (April 2014)
2. StepChange Debt Charity Statistics Yearbook 2013
3. The £8.3bn Challenge a report by StepChange Debt Charity (October 2014)
4. All findings unless otherwise stated are taken from a forthcoming report by StepChange Debt Charity. Survey results based on a survey of 923 StepChange Debt Charity 23 June-24 July 2014