Debt options in the wake of Covid-19

Money Advice Trust Policy Manager Meg van Rooyen blogs on the Trust’s new policy briefing on debt options in the wake of the Coronavirus pandemic.  Note: This blog is adapted from a forthcoming article in the IMA’s Quarterly Account.

The temporary measures put in place by Government and regulators to support household finances through the Covid-19 outbreak are without precedent in scale or scope.  The introduction and subsequent extensions to the Job Retention Scheme, Self-employment Income Support Scheme and payment deferrals on mortgages, credit cards, loans and other forms of consumer credit have all helped households to deal with the immediate effects of the outbreak.

In recent months, however, attention has rightly turned to the future.  Many households are likely to be dealing with the financial consequences long after the various temporary measures introduced by the Government and by regulators are lifted.  Action is needed now to ensure a path to recovery for these households.

This includes providing robust and effective debt options that work within the new context of this global pandemic, are affordable for those who need to access them, and support the financial recovery of households and the UK economy.

Challenges to the debt options landscape

The impact of Covid-19 has given rise to several challenges to the debt solutions landscape.  The proportion of debt advice clients with deficit budgets is likely to increase.  Eligibility gaps are widening in statutory solutions – with these new circumstances presenting a risk of people being excluded from solutions that would otherwise help them to resolve their financial difficulties.  Income shocks cause by Covid-19 are making bankruptcy  and Debt Relief Order fees even harder to meet – and risk throwing some who are already in solutions, such as a Debt Management Plan or an Individual Voluntary Arrangement, off course.

Given these challenges, we think a wide-angle look at the debt solutions landscape would be timely.  As we recommended in our response to the Cabinet Office’s recent call for evidence on fairness in government debt management, the Government should commission a full review of the debt options available to be people in financial difficulty – to ensure that no one is allowed to fall through the cracks in a framework that has evolved in a piecemeal fashion over several decades.

Crucially, given the urgency created by the impact of the pandemic, we think this review should be conducted in two phases.

  1. A quick-fire review of the short-term temporary changes to debt options that need to be made for Covid-impact customers; followed by
  2. Work on the longer-term changes needed to reset and future proof the debt solutions landscape (also taking into account the then Money Advice Service’s recommendations from 2018).

It’s worth noting that there have been some improvements to debt solutions made in recent years – such as the widening of eligibility criteria for Debt Relief Orders, and the forthcoming introduction of the statutory Breathing Space scheme, which will help smooth the path into appropriate debt solutions for many more people in debt.  Once joined by Statutory Debt Repayment Plans – which we are urging Government to bring forward as soon as possible – these changes represent a significant step forward on what there was before.

Nevertheless Covid-19 gives us the opportunity – and the duty – to take a collective look at what people in debt need.

The Scottish Government and Accountant in Bankruptcy are ahead of the game on this – with a raft of temporary changes to debt solutions to help people in Scotland through the outbreak.  In the rest of the UK there have at least been some changes to the IVA Protocol, which are welcome – but more action is needed.

Changes that a review could consider

In our new policy briefing, Debt options in the new normal, we have brought together some of the possibilities for each debt solution that should be considered as part of such a review.

It is important to say that the changes listed in our briefing are a range of possibilities, rather than a suite of collective recommendations that cohere as one package of measures.  It will be important for a review to consider not only each individual change, but also the holistic impact of combinations of these changes, how they interact with each other and the overall impact on the debt solutions landscape.

Some of the changes that a review could consider include:

  • Waiving the £90 DRO fee for an extended temporary period of perhaps 12 months – and waiving this permanently for those on income-related benefits.
  • Increasing debt and asset limits for DROs to reflect the fact that people in a broader range of circumstances are falling into debt due to Covid-19.
  • Reducing the bankruptcy fee or waiving it for those on income-related benefits, following the precedent set in Scotland.
  • Further amending the IVA  Protocol – to allow missing payments due to Covid-19 to be written off, rather than adding them to the length of time the IVA has to run.

You can read more about these and other possibilities in our full briefing.

New debt options required?

There is undoubtedly a need for imaginative solutions to the accumulated debt caused by the Coronavirus outbreak, which go further than changes to enable easier access to existing debt options.  There have been various proposals put forward that take a wider view than the changes we have outlined to existing debt options (for more, see Citizens Advice’s Excess Debts report, StepChange’s briefing on Coronavirus and personal debt and Shelter’s proposed emergency grants and loans to help tenants pay off rent arrears).

For those with available income and who can afford to meet a proportion of their payments, StepChange have launched their Covid Payment Plan, designed for Covid-impacted clients who are likely to be in only temporary financial difficulty.

Here at the Trust, we have been discussing with stakeholders ways of ensuring that Covid-impacted consumer credit customers have greater access to firms’ ability to reschedule/rewrite agreements, with appropriate safeguards in place, as a means to minimise credit rating impacts for people in temporary difficulty.  The FCA has included specific guidance on refinancing, in their post-October Covid guidance, which could form the basis to go further in this important area.

We are interested to see how these various ideas and proposals develop – and any full review of debt options should be prepared to think in similarly bold terms.

Short term and long-term changes

A debt options review, both in terms of considering the urgent short-term changes necessitated by Covid-19, and how to reset and future-proof the debt options landscape for the longer term, would have its work cut out on both fronts.  A review is badly needed, however, if we are to ensure that no one is left without a debt option appropriate for their circumstances.

We would be interested to hear others views on some of the options in our new briefing – do get in touch.

Read the Money Advice Trust’s new policy briefing, Debt options in the new normal, here.

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