Every debt adviser wants their clients to get out of debt and then stay out of debt. But there is very little evidence about how long people stay debt-free after clearing their debts, through debt management or insolvency. So CAP’s Freedom Report, published this week, is very interesting reading.
DMPs and DROs were the most frequently used debt solutions for CAP clients in 2015, who had an average household income of just £14,500. CAP have surveyed 214 clients, roughly half DMPs and half DROs, who became debt-free more than a year ago. Two key findings were:
- 95% of DMP clients were still free of problem debt and 91% of DRO clients;
- 93% of DMP clients had used credit and not experienced problems. For DRO clients this was a lower 73%.
Is a DRO too short to learn good financial habits?
People often find that difficulty budgeting makes other financial problems worse, leading to problem debt. DMP clients at CAP are encouraged to budget and to save a small amount each month, to help them manage unexpected expenses and income changes during the DMP. This is also a way of building good habits that will enable them to remain debt-free afterwards.
Debt relief in a DRO is much faster, so there is a much shorter window during which clients have the support of CAP to budget and save. But the survey found that 82% of DRO clients were still budgeting a year later – exactly the same percentage as DMP clients. This is very encouraging and CAP concluded:
despite working with CAP for a much shorter length of time, clients going through a DRO are equally as equipped to budget as DMP clients.
However there is a big difference in one area between the two debt solutions. A very healthy 91% of DMP clients felt in control of their finances a year after becoming debt-free, but only 78% of DRO clients did. And DRO clients were much less likely to have savings – only 20% did, compared to 69% of DMP clients.
This is what most advisers who see a lot of DRO clients would have expected. Many DRO clients will have had close to zero or even negative Disposable Income, and the best financial capability skills in the world will still not make them secure. “Only 20%” having savings is a major achievement for this group. As CAP say:
it seems more credible that the observed differences between the two groups are due to those granted a DRO being more likely to face challenging circumstances, especially low income. This seems more likely than the high speed of debt relief through a DRO leaving clients less well equipped to remain debt free.
What would other agency’s clients say?
CAP are rightly proud of their holistic approach to debt advice, treating financial capability and support as an integral part. One DRO client quoted in the report said:
I was in a really bad debt situation, but CAP saw me from beginning to end and didn’t just leave me half way through to get back into the same mess.
Many other debt advice agencies don’t have the resources to take this approach. It would be very interesting to see if as many of their DMP and DRO clients are still debt free after a year.
And as funding in 2017 looks set to be even more difficult for many agencies, the problem may become even harder. When funding is tight, it tends to be tied more and more closely to short-term targets, rather than sustainable, long-term debt free solutions. If regulators and funders want to achieve long term results, the funding metrics and KPIS have to be set with this in mind.
Welfare changes will make this harder
CAP point out that:
the research raises concerns about wider external challenges faced by clients, which impact their ability to remain free of problem debt.
And there are a several factors that seem likely to worsen these external challenges in 2017:
- the roll out of Universal Credit across more of the country;
- the reduction in the Benefit Cap;
- the restriction of benefits to the first two children; and
- increases in Council Tax in excess of real income income growth and decreases on Council Tax Support in many areas.
All these are likely to increase the number of people in need of a DRO and make it harder for them to continue to be debt free afterwards.
I don’t want to end by listing problems. This is a hugely positive report, with a wealth of detail, including how clients have passed on improved financial skills to other people; feel they have a positive relationship with their bank etc.
So I’ll finish by mentioning the roll out of the Standard Financial Statement from March 2017, which includes a provision for a savings line in budgets. Adding that line won’t magically mean that clients do save, but over time it can help to develop an expectation that accumulating small savings is part of the process of becoming debt-free.