Debt advisers call on government to review ‘breathing space’ moratorium

We Are Debt Advisers, a grassroots campaign aimed at helping those affected by the devastating impact of long-term debt, has called on the government to amend its ‘breathing space’ moratorium, which is due to start in May.

The new legislation will offer a 60-day period of ‘breathing space’, where debtors will be temporarily exempt from paying creditors.

It is intended to incentivise people to seek professional debt advice sooner, and to give them time to identify the most appropriate solution for their circumstances. In principle this is strongly supported by campaigners, but calls are mounting for a review into the specifics of the scheme, which threaten to further isolate the most financially vulnerable.

‘The campaign itself has grown significantly since it was first proposed at the Greater Manchester Money Advice Group in November 2020,’ says Tim Nelson, a debt adviser at Stockport MBC.

‘We have had many advisers sign up to our letter to John Glenn, the economic secretary, who as a result of the concerns we have raised has promised an early review of the breathing space following its introduction in May.

‘We have also attracted support form a number of trade union branches, and recently the Institute of Money Advisers (IMA) has agreed to support our campaign, passing two motions at its annual general meeting on 2 February.  The intervention of the IMA has been instrumental in a number of amendments, supporting the campaign’s aims, being introduced into the Financial Services Bill by Lord Lucas.

‘We Are Debt Advisers continues to believe that the best way for our and our client’s concerns to be addressed is via the input of advisers working on the front line.  Too often legislation has been driven by politicians and the policy departments of larger charities and organisations.’

The campaign has identified key areas which it feels need readdressing in order to meet the government’s initial policy objectives, and assist beneficiaries of the moratorium in the most effective way possible. Its immediate argument is that 60 days of respite does not reflect the ‘real time’ actualities of applying for debt relief, which can alter drastically depending on circumstances.

The initial consultation process for the development of the scheme took place between 2017-19, before the pandemic, and as such fails to reflect the new conditions being dealt with by advisers and their clients. The Money and Pensions Service predicts that 3m more people will be in need of debt advice by the end of 2021, and it is estimated that 40% of current clients have a ‘deficit budget’, where their basic living expenses are less than their income, making regular repayments impossible.

We Are Debt Advisers (WADA) is therefore calling on the government to allow discretion to extend this period based on each case; factors which can impact a debtor’s ability to find a suitable solution are extensive, from challenging personal circumstances (for example homelessness, substance abuse, imprisonment) to communication needs where English may not be a first language and time is required to source an interpreter, to wider issues such as domestic abuse, divorce and bereavement.

The current proposal would also insist on a ‘mid-term review’, which WADA has described as ‘unnecessary, intrusive and wastes debt advisers’ time and resources’. Debt advisers, who strive to develop trust with their clients through challenging circumstances, would be obliged to assess whether participants had adequately engaged with them during this period, not incurred additional credit exceeding £500, and maintained all basic payments including mortgage/rent, utility bills, council tax and insurance. The nature of many client’s circumstances, particularly those with a deficit budget who may be forced to borrow money simply to survive, makes these conditions unfair and impractical, and adopting a ‘reprimand’ system at this point has the potential to seriously damage long term progress between advisers and their clients.

The campaign has also thrown into harsh light the inadequacy of current debt solutions in helping people to resolve their debt for good.

‘Currently the options are, to enter an insolvency procedure or commit to long-term repayment plans,’ Mr Nelson explains.

‘The Debt Relief Order (DRO) scheme imposes limits on those that can access it; specifically, those who owe less than £20,000 and have no spare income or assets.  Yet there is a fee of £90 that is payable before the order can be made.  Many clients are in receipt of benefits and cannot afford this – we believe it would be much better to abolish the fee entirely.

‘The fee to petition for personal bankruptcy at £680 renders this solution almost entirely out of reach for the majority of our clients.

‘If a client is unable to meet the fees either for a DRO or bankruptcy, this leaves an Administration Order (AO) as a form of insolvency that can be accessed without an upfront fee.  However, given that the limit on an AO is £5000 and a client must also have a County Court Judgement against their name, only a very small percentage of clients have this as an available solution.

‘Clients could also potentially seek an Individual Voluntary Arrangement.  Typically, this would require them to commit all their available income to repaying creditors over a period of five years.  IVAs are only accessible if someone has enough available income to repay around 30% of their total indebtedness, which essentially means that only those in full-time employment can access this strategy.’

WADA proposes removing or making fees means tested for DRO and bankruptcy options, with debt limits for DROs and AOs significantly increased to make them fit for purpose. It also recommends that IVAs be externally regulated, for example by the Financial Conduct Authority.

‘In the midst of a health crisis, our clients should be able to use what income they have to keep themselves and their families safe. This money is better spent in local businesses, supporting local jobs, not on long-term repayment plans – especially when historic debts have often been bought by companies for a fraction of their face value.

‘These clients should be able to take steps that will relieve them of their indebtedness.  We believe that this could be achieved by some form of debt forgiveness that does not rely on established insolvency options which are often out or reach.

‘After all, often people are not in debt because of their own actions, but more due to unexpected events.  Debt relief should be offered in a manner that allows them to keep their dignity. If a client is unable to repay their debts, there is no point forcing them to pay a fee or act in a manner deemed to show contrition. We believe that there should be a simple solution without cost that they can follow.’

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