As lockdown is gradually phased out and furlough payments eventually stop, many people will not be able to return to their pre-Coronavirus situation of being able to manage their debts and bills.
Now is the time the debt advice sector should be considering how to prepare for the large demand it may face and what may need to change.
We don’t know how many people will have problems
We don’t know how many people will need debt advice in the next year because of the pandemic. One million, three million or five million… we cannot delay planning until the numbers are clear.
Anyone who thinks it will be much less than a million needs to think again about the scale of the debt problems in this country before the current crisis and the number of households who have already fallen behind with an important bill because of Covid-19.
We have a short window now to plan as the advice sector is not yet overwhelmed because of Coronavirus.
Many people who will eventually need debt advice are either managing through payments breaks or are concentrating on what their income will be through government support/benefits. The following plaintive plea in a Facebook group is typical:
But we do know the sorts of problems that are likely
There are many groups of people who could benefit from good debt advice.
Some people will be back to normal in a couple of months, with a bit more interest accumulated during payment breaks. But they can cope, they aren’t looking at big problems. Although they could benefit from good money advice, they aren’t going to be on the priority list for debt advisers.
Many people will not be back to a normal income and may be reliant on benefits. They have been made redundant, their self-employment income has shrunk or stopped, or it’s unclear when/if their jobs in hospitality, tourism etc will resume.
Others may look as though they are back to normal but they were already in a precarious position before Coronavirus. A few months extra interest, and possibly more spending on credit cards, catalogues and the overdraft, will now mean they can’t manage the normal repayments any more.
People already in DMPs may be looking at the projected time to completion extending by many years. IVAs may fail unless they can be accepted as completed on the basis of the funds paid to date. People already making token payments and hoping things will get better, may now be facing a much bleaker prospect.
There will be people facing immediate crises because of priority debt problems.
Housing is top of the list:
- the prospect of mass evictions for rent arrears, especially in the private sector, is real. The government has to either prevent the evictions or to pay benefits at a level which enables people to pay their rent, which includes removing barriers such as the benefit cap and two-child limit.
- for mortgages, the government has to choose between extending mortgage repayment holidays for much longer or replacing the current Support for Mortgage Interest – too little, too late and too complicated – with a system that actually works.
But council tax debt and utility bills are also a major concern. Council tax has been relatively easy so far as many councils at the start of the tax year have been prepared to accept no payment for a couple of months – that is unlikely to last. There are persistent reports of utility providers not being prepared to give payment breaks or accept reduced payment. Unless the government is prepared to step in with money and/or regulation, these priority debts will generate a lot of work for debt advisers.
Debt advice was in very poor shape before Coronavirus
So there is going to be a lot of demand for debt help.
The Resolution Foundation said about the labour market:
looking in the rear-view mirror is as important as staring into a crystal ball when it comes to understanding where the world of work might be heading beyond the crisis.
And I think the same applies to debt advice. Not as a chance to bring out a wish-list for a kinder/greener/more ethical future but because the debt advice sector was not coping at all well before this crisis and we need to understand why.
In 2019 did not go well – what will happen in 2020? my new year review listed a lot of the problems. If not tackled, these problems will make it impossible to deliver good debt advice to many more clients in 2020 and 2021:
- falling Disposable Incomes with a significant number of clients having negative DIs. This is problematic not just for debt advisers but also creditors;
- cases getting more complex. As I said – “Debt advice agencies are facing a choice between giving an excellent service to some clients, a sub-optimal one to a lot more or being overwhelmed by the workload.“
- no progress on debt advice funding. With too many funding contracts having unreasonable targets, bureaucratic and insulting peer review system, low wages and being too short term. The result being experienced advisers leaving the profession and a recruitment problem.
- a group of interlinked insolvency problems, including the number of people being missold IVAs; the amount of adviser time needed to set up DROs; and the unaffordably high level of bankruptcy fees.
I concluded that review saying:
In 2019 with record employment numbers and historically low-interest rates, there were millions of foodbank parcels needed and the debt advice system was struggling to keep up with demand. Any downturn in the economy and 2020 looks scary.
And here we are, five months later, facing not a downturn but the deepest recession since the second world war.
The previous plans for 2020 won’t help
This was the year the Breathing Space should have come in, planning should have been complete for the Statutory Debt Repayment Plan (SDRP) and MAPS hoped Open Banking could streamline debt advice.
On one level the Breathing Space looks more necessary than ever. But the last couple of months have demonstrated that:
- 60 days is simply inadequate. It doesn’t give time to resolve priority debts and develop a plan for non priority debts;
- credit recording is not some unimportant side effect. It has to be clear and not left up to individual creditors;
- all government debt has to be included;
- as proposed it will require a lot of work from debt advisers. This has to be simplified or it will make an already difficult situation worse, not better.
The SDRP is looking increasingly irrelevant. This does not look the time to propose full debt repayment over ten years as a sensible, mass debt solution. If it had been in place at the start of 2020, we would now be looking at many SDRPs failing or being extended a long way.
Hopes that Open Banking will be able to make the process of giving debt advice more efficient this year have been dealt a blow. I am not a Luddite; I have always been an enthusiast for Open Banking helping debt advisers. But it many cases someone’s previous income and spending patterns are now completely irrelevant and will be for a year or two.
What will help – five common principles for moving forward
I propose the following five principles
- Aim for robust policy design We don’t know how long this crisis and the ensuing recession will last. But plan for it to be bad and long, don’t cross your fingers and hope you can get away with a bit of tinkering.
- Standardise! Luckily we aren’t at the starting line on this one, we already have the Standard Financial Statement. It now needs to be used by every creditor, including HMRC, the MoJ, the DWP, LAs and utilities. No exceptions. Every time one creditor or one type of debt is treated differently, it makes the debt advice process longer and more complicated.
- Don’t shift work somewhere else that can’t cope The answer to the high amount of work a DRO creates for a debt adviser is to redesign the system, not put everyone through bankruptcy and land the Insolvency Service with an impossible workload. If a creditor can see a customer has no disposable income and isn’t likely to for a long while, why not write off the debt instead of referring them for debt advice?
- Promote self-help and trust people in debt Not everyone needs to talk to a debt adviser. Creditors and regulators need to resist the temptation to insist that debt advisers validate everyone’s problems. There is little moral hazard here “They haven’t got the money, it’s not their fault and that’s basically it” as a debt adviser on Twitter said last week.
- Better debt advice funding MAPS knows the huge problems its current debt advice contracts are causing. Just sort them. Get out your red pen and scrap the targets, bureaucracy and DAPA. Also extend the contracts by three years and give everyone a pay rise.
- I have written a separate article about how personal insolvency needs to be reformed to cope with the additional numbers of insolvencies expected.
- On June 2020, MAPS announced a 60% increase in debt funding to help meet the increased demand for debt advice caused by Coronavirus.
- In January 2021, the Insolvency Services started a consultation on changes to DRO criteria.
- IN April 2021, StepChange announced staff cuts because of falling income.