Debt charities respond to ‘breathing space’ consultation

Debt charities, StepChange and the Money Advice Trust have responded to the HM Treasury’s consultation on debt “breathing space” and a new defined statutory debt repayment plan (SDRP). The scheme will enable, people who enter into arrangements to pay back their debts in full whilst getting a level of statutory protection that has previously only been in place for those taking insolvency-based approaches.

The government’s new breathing space scheme must protect people from debts owed to public sector organisations to be effective, according to the Money Advice Trust, the charity than runs National Debtline and Business Debtline.

In its response to the consultation, the Money Advice Trust has welcomed several aspects of the proposals but warns that their success is “critically dependent” on including debts owed to central and local government in both breathing space and the new ‘statutory debt repayment plan’ also under consultation.  Current proposals do not specifically exclude the public sector from either scheme, but neither has the government explicitly confirmed that these will be included.

The last decade has seen significant rises in the number of debts owed to local authorities, the Department for Work and Pensions, HM Revenue and Customs and other government bodies. The proportion of National Debtline callers with council tax debts has doubled from 15% in 2009 to 30% in 2018, while benefit and tax credit overpayments have surged from 3% of callers in 2010 to 16% in 2018.

The charity says that the methods by which these debts are collected often cause the most disruption to the ability of people in problem debt to resolve their financial difficulty. 73% of callers to National Debtline surveyed who owed debts to local authorities reported that the council’s actions had negatively impacted their wellbeing, with 74% reporting the same for DWP and 71% for HMRC.

The widespread and growing use of bailiffs to collect council tax and other debts owed to local authorities has been the subject of particular scrutiny, with previous research from the Money Advice Trust showing that 2.3 million debts were referred to bailiffs by councils in England and Wales in 2016/17 – an increase of 14% on two years earlier.

The charity has welcomed several other aspects of the breathing space proposals including an extension of the protection window to 60 days and the government’s decision to include the business debts of sole traders, which it says will make a significant difference to many of the people it helps through Business Debtline.

Joanna Elson OBE, Chief Executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline said “The government has done a good job with its proposals for breathing space, and we are broadly encouraged by what we have seen. If we can get this right, an effective breathing space scheme could transform the fight against problem debt.

“Success is critically dependent on making sure that the scheme includes debts owed to public sector bodies like local authorities, DWP and HMRC – and not just banks, credit card companies and energy firms. These debts owed to public sector creditors are often the debts that people in financial difficulty have the most problems with, and we have seen them grow significantly in recent years.

“The scheme must provide a genuine ‘breathing space’ from all types of creditor, to give people the time they need to seek advice and resolve their debt problem.”

“A successful breathing space scheme will encourage many more people to seek debt advice, which is extremely welcome. However, the government must also make wider arrangements to improve funding for free debt advice, to ensure that this additional demand can be met by increased supply. Failing to ensure this additional funding risks seriously jeopordising the scheme’s success.”

Phil Andrew, CEO of StepChange Debt Charity said “The principle of extending statutory protection to those seeking to repay their debts is enormously welcome. The refinements we suggest are designed to be constructive, to ensure that the policy intentions are met in practice, and that the maximum number of people can be helped. We look forward to working with Government and the rest of the advice sector on the rollout of these exciting new protections as soon as the practicalities allow.”

In particular, StepChange believes that:

• It is absolutely vital that debts owed to Government (as well as to private creditors and utility providers) are included in both the Breathing Space and the SDRP. If they are not, there is a real risk that schemes will fail more often. People often respond to unaffordable payment demands and threats of enforcement by unrealistic attempts at juggling or borrowing to pay, which causes more problems. So, unless all of a person’s debts are included, this risk remains – and is especially concerning given that government debt collection practices lag behind those in the regulated private sector. On a separate but connected point, deductions from benefits to repay debt should stop during the Breathing Space period for the scheme to be effective.
• Any central register of those using Breathing Space or SDRPs must operate on a closed rather than a public basis. If it is public, many people who would potentially benefit from the protections may refuse to use it. A public register also puts people at real risk of being targeted by disreputable, exploitative or fraudulent entities.
• It is right that debt advice should act as the “gateway” to accessing Breathing Space, providing a clear incentive for people to take advice. It is important to make use of existing infrastructure and processes where possible, to ensure value-for-money and a proportionate impact on the new costs that debt advice agencies will incur.  For example, aspects such as the proposed requirement to undertake a pro-active 30-day check that a client is complying will be costly and are unlikely to provide additional value. If debt advice charities have to absorb such costs, they will detract from the ability to provide other services.
• It is important that the Government recognises that the 60-day period proposed for Breathing Space will not be long enough to set up a debt solution for some people, even where a solution is identified and being put in place. People risk “falling out” of protection between Breathing Space ending and a solution being in place. A good way of mitigating this risk would be to enable the debt advice “gatekeeper” organisation to be able to trigger an extension to the protection period in these circumstances.
• More generally, we think that both Breathing Space and the new SDRP will have the best chance of meeting their policy objectives, and reducing the drop-out rate, if a little more flexibility can be built into them. For example, the 10-year maximum “appropriate timeframe” for an SDRP should be a guide, rather than a firm cut-off; the requirement to meet ongoing liabilities within the Breathing Space period should be less rigid if individual circumstances suggest this is appropriate; and some flexibility to allow occasional short payment breaks at the discretion of the debt adviser in appropriate circumstances would reduce plan failure rates.

The charity’s final point relates to funding. StepChange thinks the principle that creditors who benefit from receiving payments under SDRPs should make a compulsory funding contribution is reasonable. It stands in contrast to the voluntary contribution system that currently exists on debt management plans. However, the suggested 8% contribution figure needs further consideration, alongside a more holistic view of debt advice sector funding.

At 8%, even if applied across all creditors, StepChange Debt Charity estimates the income it would receive in total would be less than it currently receives under voluntary contributions. More generally, the funding of the debt advice sector needs reviewing in the round. At the moment, funding generally supports solutions rather than advice, and is patchy across different solutions and poorly aligned to the actual costs of delivery. It would be helpful to pause the decision on SDRP contributions until a more rational funding system is reached across the debt advice sector as a whole.