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Poor treatment of people in debt deepens financial hardship

8 June 2016

Poor and inconsistent treatment of those struggling with debt is making many people’s financial problems worse, according to new findings from StepChange Debt Charity.

A survey of 1,800 of the charity’s clients shows how people with debt problems are routinely hit with interest and charges which make recovering from their financial difficulties harder. The findings also highlight how aggressive enforcement and demands for unaffordable repayments can lead to a vicious cycle of deepening debt and greater hardship.

The Government is currently reviewing the case for a statutory ‘breathing space’ scheme for people in temporary financial difficulty [2]. This research suggests the need for such a scheme is getting more urgent. The charity’s call for such a scheme is supported by Martin Lewis, the founder of MoneySavingExpert.com, and Steve Pateman, the Chief Executive of challenger bank Shawbrook.

Interest and charges

The charity’s research shows a widespread problem of interest and charges being added to debts which makes a person’s recovery from their financial problems much harder. The charity is particularly concerned by evidence that indicates that in a significant proportion of cases, creditors and debt collectors are adding interest and charges despite being aware of people’s financial difficulties and/or their efforts to seek debt advice. The survey revealed:

  • 68% said that default charges made their debt problems harder to deal with
  • 62% said that creditors and debt collectors continued to add fees and charges despite knowing the person was in financial difficulty
  • 52% said creditors and debt collectors continued to add fees and charges after they knew the person was seeking debt advice

Aggressive enforcement

The aggressive pursuit of debts via threatening phone calls, bailiffs and other strategies can cause untold anxiety and stress and often pressures people into making unaffordable repayments. The research found that:

  • 65% of clients have experienced some level of bad debt collection practice in the past two years
  • 17% of people said they’d experienced an intimidating or threatening visit from a doorstep collector in the past two years
  • 41% said they’d received intimidating or threatening phone calls in the past two years
  • 16% of clients had been contacted by bailiffs in the last year
  • 53% of those contacted by bailiffs said it had made their debt problems harder to deal with; while 15% said that they’d felt forced to take out more credit

Paying back what you can’t afford

Pressure to repay unaffordable amounts can deepen existing financial problems and unnecessarily prolong the period it takes a person to get back on their feet. The charity’s evidence highlights a number of problems relating to demands for unaffordable repayments:

  • 26% said that debt collectors had taken repayments they could not afford
  • 14% of respondents said creditors had taken repayments that they could not afford direct from their wages or benefits
  • 20% of respondents said they’d found utility providers repayment rates unaffordable

Give people ‘breathing space’

The charity’s research shows that recovery from serious financial difficulties is dependent upon getting protection from debts being inflated through the addition of default interest and charges, collection and enforcement action by creditors and pressure to meet unaffordable repayments. The charity believes that a new ‘breathing space’ scheme is needed to ensure that people in debt get the protections that are needed [3].

A ‘breathing space’ scheme would see people who seek advice for debt problems given a period of six months to a year in which interest and charges are frozen and enforcement action halted, giving that person time to get debt advice to recover their finances. Where people can repay their debts at an affordable rate and within a reasonable time, these protections should continue. These protections would only be accessible when recommended by a regulated debt advice agency.

Previous research by the charity has highlighted the gap in the existing suite of options available to people whose financial difficulties may be temporary. The current patchwork of voluntary schemes and proposals means that some people will get help from their creditors in the form of a freeze on interest and charges or halt on enforcement action, but others will not. When such help isn’t forthcoming it can turn potentially temporary financial problems into entrenched debt problems.

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

“The current options available to people struggling with debt aren’t working. If people do the right thing and seek debt advice in order to tackle their debts, they should get the support that they need to recover.

“Some creditors are providing support for their clients, but the lack of a consistent approach and the lack of statutory guarantees means that just one creditor engaging in poor practice can undermine a person’s ability to resolve their debt problems.

“The Treasury and Insolvency Service’s ongoing review of the legal framework for debt administration represents a genuine opportunity to make a difference to the treatment of people in financial difficulty. Helping people get back on their feet is good for the individual, their families and their communities. These findings are yet further evidence of the need for action at a time when consumer debt is growing at its fast rate in ten years.”

Steve Pateman, Chief Executive of Shawbrook Bank, said:

“This research underlines the fact that people in temporary financial difficulties have no guarantee that creditors will call off interest and charges or accept affordable repayments.  Undoubtedly this puts people off seeking assistance.

“Voluntary industry initiatives have had a positive impact – yet each time a creditor refuses to help, temporary difficulties can quickly get a lot worse.

“A new Breathing Space scheme would fill the gap between existing voluntary initiatives and our current insolvency regime, offering individuals and families a platform to stabilise their situation and get back on their feet.”

Martin Lewis, founder of MoneySavingExpert.com, says:

“Instead of helping keep people afloat, which would result in the long run in people being in a better position to repay what they owe – these findings show that lenders and debt collectors are piling on charges and pressure. We need to do more to help people struggling with mounting debt, and protect people from unaffordable high interest rates and charges coupled with heavy-handed tactics.

“Bringing in a widespread breathing-space scheme won’t just help people financially, but will also reduce the damaging mental-health consequences that are often a symptom of serious debt pressures.

“While some creditors already freeze interest and charges for people who are struggling, it only takes one creditor to not provide breathing space to stop those in financial difficulty sorting their finances. It’s time for the Government to step in.

“By freezing the costs for people who are trying to repay, and allowing them time to get their finances back on track, it could also help lenders increase the amount they actually recover in the long run.”

Notes to editors:

1. All findings taken from a survey of 1,800 StepChange Debt Charity clients conducted in May 2016

2. In response (PDF) to the Review of the Money Advice Service, the previous Government announced that HM Treasury and the Insolvency Service would review the ‘legal framework for debt administration’

3. Safe Harbours (PDF report by StepChange Debt Charity – December 2014)

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