A statutory breathing space scheme for debtors would bound all creditors, from financial services to local councils, by the same rules. Mike O’Connor explains the logic
People who are tackling their problem debt deserve free advice and support.
StepChange Debt Charity is calling for better protection in the form of a statutory ‘breathing space’ scheme.
A breathing space scheme would allow people who seek debt advice a period of six months to a year, in which interest and charges are frozen and enforcement action is halted, in order to give them time to recover their finances.
Where people can repay their debts at an affordable rate and within a reasonable time, these protections should continue.
Such protections would only be accessible when recommended by an FCA regulated debt advice agency.
Our proposal would build on, but go further than, the protections already available to people in Scotland under the statutory debt arrangement scheme.
The difference that this scheme could make is huge, both from a financial and physical and mental health perspective.
If you take the example of someone who has lost their job, their finances are in a fluid state and it may be that they can’t afford an insolvency option, insolvency might not be suitable at that point or they can’t afford a repayment plan.
But a guaranteed freeze on interest and charges will stop their financial situation deteriorating further.
Without it our clients would face, on average, an extra £2,300 added to their accounts in default interest and charges.
That crucial guarantee of a freeze on interest, charges and enforcement action would encourage people to get advice earlier, and again this has a material difference.
Our clients who sought advice within the first month of worrying about their debts owed and average of £5,000 less than those who waited over a year to get help.
The need for such a scheme is clear.
Everyone tackling problem debt needs support, but for people in England, Wales and Northern Ireland there is no guarantee of protection from default interest and charges, pressure to make unaffordable payments and collection and enforcement action unless you enter into an insolvency arrangement. Insolvency is only the right option for one in five of our clients.
People taking action to deal with their debts and repaying them through an arrangement like a debt management plan are not afforded these statutory protections.
It’s not just good for the individual, it’s good for creditors too, as they potentially benefit from saving on the cost of recovering debt, more stable and sustainable repayments, reduced debt balances and enhanced consumer trust.
Many creditors do offer borrowers forbearance, but when they do not, recovery from debt can be much more difficult, if not impossible.
Under the breathing space scheme, all creditors, from financial services to local councils, would be bound by the same rules on halting enforcement action and freezing charges.
This is crucial because it prevents a situation in which one firm can undermine the actions of others who are doing the right thing by showing forbearance, with the result that the borrower is left without a stable and affordable route towards financial recovery.
In March 2015 the government committed to reviewing the case for a breathing space scheme and that the review would be completed by the end of that year.
Since that original deadline passed, more than one million people have sought help from StepChange and our partners in the sector.
The government reconfirmed its commitment to the review in this year’s Budget, but we are still waiting.
Momentum is however gathering behind a private member’s bill, sponsored by Conservative MP Kelly Tolhurst and supported by The Children’s Society and StepChange which highlights the need for the introduction of breathing space.
Founder of moneysavingexpert.com Martin Lewis, who has regularly supported calls for such a scheme has offered a full-throated endorsement of the scheme calling the scheme “a win for the individual, a win for the state and a win for creditors”.
Breathing space is the missing piece of the puzzle when it comes to debt solutions.
With little sign that debt problems are receding we need a policy solution to help limit the devastating impact that debt can have on peoples’ lives.