Action on Debt. An introduction

Transcription

1 Action on Debt An introduction

2 AN INTRODUCTION ACTION ON DEBT Debt is increasing, particularly for low-income groups. The graph below shows how the burden of debt is spread. Unsecured debt as a percentage of income The burden of debt on low-income families has increased. Annual household income ,000 35,000 49,999 25,000 34,999 17,500 24,999 11,500 17,499 11,499 0% 5% 10% 15% 20% 25% 30% 35% 40% Average debt as a percentage of income Source: Local Authority housing rent income, Audit Commission, While for many people borrowing is a useful way of managing their money, for others it is an expensive necessity with sometimes damaging consequences. A life change can trigger serious debt for someone who is already struggling to make ends meet, sometimes forcing them to take out loans that can result in unsustainable repayments and real hardship. Action on Debt highlights the damaging impact that serious debt can have not only on individuals, but on communities and on the public and business sectors. It gives practical guidance on how organisations should tackle the problem. 1

3 ACTION ON DEBT WHAT IS PROBLEM DEBT? Debt is a problem when people can t repay what they owe or when doing so causes them real hardship. The Financial Services Authority has found that 6.1 million families reported some difficulties meeting their debt repayments. 2 Low-income groups are hit harder than any other: More than half of all households with serious debt have incomes of less than 7,500 a year. 3 They are unlikely to have savings to cushion them through a loss of income or unexpected expenses. Low-income groups are three times more likely than the general population to be in arrears with rent, council tax, utility bills or mortgage arrears. 4 People can experience hardship when debt repayments eat up money they need for essentials like fuel, food and rent. Problem debt results in stress, poor health and family breakdown, and undermines efforts to reduce child poverty, health inequalities, unemployment, neighbourhood decline and homelessness. People s experiences of living on low-income and with debt can be striking: It was hard keeping out of debt, short-term you manage, the long-term was harder especially when the kids need school uniforms, money for school trips, washing machine breaks down, for Christmas. 5 My sacrifice was warmth. I have kept my family warm by burning anything we could, I even burnt kids clothes that didn t fit them any more, bits of wood, etc, I never had heating on during the day until the kids came home. Sometimes it was so cold the kitchen sink and the toilet would freeze overnight. 6 I cook a meal and as long as there s plenty for them, I make do with a piece of toast. 7 2

4 AN INTRODUCTION WHAT CAUSES DEBT? People on low incomes are already living on a very tight budget. They generally have very good money management skills but life events such as losing a job, illness, separation or having a baby can tip them into problem debt. Taking out a loan can be a helpful way out it s only when the terms are unsuitable or the repayment is really high that troubles start. Faced with a scarcity of loan products that are affordable and appropriate or unaware of options such as credit unions or community banks some people take out very expensive credit. It s a decision which can affect their lives for years to come, sometimes resulting in even deeper debt and more stress. Doorstep lenders are successful because they meet a need among lowincome groups for loans at a low weekly cost. However, a six-month loan from a doorstep lender can typically have an annual percentage rate of 200 per cent. Better access to financial advice and affordable credit facilities can help people navigate the market. The debt divide Lack of access to affordable loans widens debt disadvantage considerably. A survey in Liverpool found that annual percentage rates charged to clients in debt to pawnshops and homecollected credit providers on a six-month loan ranged from 69 per cent to 365 per cent. Only about 10 per cent of those surveyed used store or credit cards; most people spoke of not being able to get them. 8 3

5 ACTION ON DEBT When people fall into debt, they need advice and support on how to escape. Citizens Advice Bureaux alone deal with well over a million new debt enquiries a year, but advice services have the potential to help far more people. At present only 20 per cent of those in arrears seek advice. 9 Given sufficient funding, such services could make significant inroads into reducing the size of the debt problem. THE IMPACT OF DEBT Problem debt is damaging to individuals, communities, the public sector and the wider economy. Health Around one in eight Citizens Advice Bureaux debt advice clients have started treatment for stress, depression or anxiety since their debt problems began. 10 Physical health is also affected by stress and by cutting back on food or heating. This imposes a direct burden on services such as the National Health Service. My illness, depression and stress have been exacerbated by my debt problem. As a result I cannot get well enough to go back to work to earn money to pay the debts. Quoted in In too deep, Citizens Advice, Employment Debt can act as a disincentive to work. People worry about the cost of starting work, bridging the gap until the first pay cheque and greater repayment demands. Problem debt can also cause ill health, absenteeism and loss of productivity for those in work. Child poverty Debt problems can cause hardship for children: one study suggests that two-thirds of children in severe poverty have parents who have experienced debt over the past year. 11 Repayments can cause families to live below benefit levels and cut back on essentials, 4

6 AN INTRODUCTION affecting health, education and leisure opportunities. Debt is also one of the main causes of relationship breakdown. My debt problems have had a marked impact on my son no after school activities or uniform very sad, very hard, although he says he understands. Quoted in In too deep, Citizens Advice, Housing Problem debt can result in eviction, homelessness and re-housing costs. In 2002/03 mortgage and rent arrears were the major causes of homelessness for over 5,000 households in England and Wales. 12 Re-offending Almost a fifth of prisoners experience problems with rent arrears, unpaid bills and fines, 13 problems that many find worsen while they are in prison. 14 I ve been here for over four months, but there s no one to talk to about all the money I owe. I know it ll be a big problem when I get out how I get something to live on. Adult prisoner, quoted in Reducing re-offending by ex-prisoners, Social Exclusion Unit, Neighbourhood renewal Predatory lending is stripping out money from poor communities. People are paying off interest rather than using their benefits or limited income for their own good, or in local shops. 5

7 ACTION ON DEBT TAKING ACTION TO TACKLE DEBT The Consumer Credit White Paper gives a new commitment to tackle problem debt. 15 The Government will develop a strategy focused on minimising the number of people who get into serious debt and improving advice and support for those who are disadvantaged through debt. For the strategy to work, local action is also needed from the public, private and voluntary sectors. This range of organisations should already be working together in Local Strategic Partnerships identifying key local priorities and joint action plans in their Community Strategy. This is a good forum for pooling efforts and resources to address debt, an issue that impacts on so many different objectives. A Local Public Service Agreement could also be negotiated to lever in additional funding. Action is needed in many areas. The Government provides benefits and tax credits to ensure everyone has a basic level of income. Basic bank accounts enable people to receive benefits directly and organise bill payment through direct debit. Local organisations need to promote benefit and tax credit take-up and financial products. They can also help ensure that financial services are available for the most disadvantaged, for example through post offices and banks. The Government has programmes and resources to improve financial literacy among adults and children. It is included in the curriculum for Personal Social and Health Education and the Financial Services Authority has developed a financial capability framework for teaching adults. Local organisations need to use and incorporate these into their ongoing work. 6

8 AN INTRODUCTION The Government funds many free advice services through the Legal Services Commission and part funding National Debtline. Local organisations (including housing, health and business organisations as well as local authorities) are also a crucial source of ongoing support and can ensure that services match local need. They can: Fund advice services. Resources can go further if pooled with other organisations with an interest in reducing debt. Make sure funding is directed to areas of most need by consulting the local Community Legal Service Partnerships. Signpost people with debt problems to advice services and set up formal referral arrangements. The Government supports responsible lending and affordable credit. Plans for ending unfair credit transactions are outlined in the Consumer Credit White Paper. The Government is also supporting development in the credit union sector and other sources of affordable credit. Local organisations can reap the benefits of establishing and supporting affordable loan options such as credit unions and community banks, giving people alternatives to expensive lenders. The Government encourages fair debt collection practices, for example through guidance published by the Office of Fair Trading. 16 Organisations which are owed money should adopt a realistic approach to debt collection that responds to the circumstances of the debtor. It makes good economic sense to negotiate affordable repayments with customers and their advisers, not use heavy-handed collection methods, and only take court action as a last resort. CONCLUSION It is in all of our interests to take action on debt. The factsheets in this pack give examples of what is being done and what more we can do. 7

9 ACTION ON DEBT HELPFUL INFORMATION Who is in debt? The most comprehensive source of recent information on patterns of indebtedness in Britain is the Household Survey on Over-indebtedness, commissioned by the Department of Trade and Industry from the Personal Finance Research Centre. It gives statistical information on the distribution of consumer borrowing across households, and the extent of financial difficulties being experienced. It is available at With more recent data, it updates the most comprehensive study of household patterns of spending, credit use and indebtedness: Berthoud and Kempson, Credit and Debt (Policy Studies Institute, 1992). Government Strategy The Government s approach to over-indebtedness was set out in the Consumer Credit White Paper, published December 2003 and at In the White Paper, the Government committed to developing a strategy on over-indebtedness, to be published in A cross-departmental Ministerial Group is overseeing the development and implementation of the strategy, with input from an Advisory Group consisting of representatives of the credit industry, consumer bodies, the voluntary sector and academia. The Advisory Group builds on the work of the Task Force on Overindebtedness that was set up in October 2000 to address concerns about consumer debt in the UK by considering ways of achieving more responsible lending and borrowing. Reports are at 8

10 AN INTRODUCTION Local Strategic Partnerships A single body that brings together different local organisations (public, private, business, community and voluntary sectors) to identify communities top priorities and needs and to work in partnership with local people to address them. They exist in all 88 Neighbourhood Renewal Fund areas, but many other areas have also established such partnerships. Examples and links are in the Communities factsheet. Community Strategies Under the Local Government Act 2000, local authorities in England and Wales are required to produce community strategies, which set out an integrated approach to promoting the economic, social and environmental well-being of the area, reflecting the priorities of their local communities. In preparing these, local authorities are required to consult and seek the participation of appropriate organisations and people, such as local statutory, non-statutory and voluntary service providers. Examples and links are in the Communities factsheet. Well-being powers Under the Local Government Act 2000, local authorities in England and Wales can do anything they consider likely to promote or improve the economic, social or environmental well-being of their area, so long as it is not prohibited in other legislation. The power provides an opportunity for local authorities to tackle complex problems in a sustainable way. For example, some authorities are supporting energy efficiency and reducing fuel poverty by creating financial schemes and loan packages for low-income homeowners and the vulnerable. Examples and links are in the Communities factsheet. 9

11 ACTION ON DEBT Community Legal Service The aim of the Community Legal Service is to ensure that people can get information and advice about their legal rights and help with enforcing them. It provides information and directories online at and is establishing Community Legal Service Partnerships. Community Legal Service Partnerships Community Legal Service Partnerships work in nearly all areas of England. They aim to provide the public with access to good quality legal and other advice services, by supporting and organising local networks of solicitors, independent advice agencies, law centres, local authority advice services, trading standards officers and other agencies. More information and links to your local partnership are at Citizens Advice Bureaux A network of local advice agencies, providing free, confidential and independent advice on debt and other matters. Citizens Advice is the national umbrella organisation for all Bureaux in England. Advice UK Britain s largest support network for free, independent advice centres. 10

12 AN INTRODUCTION Money Advice Trust A charity which works with government, the private sector and leading money advice agencies to increase the quality and availability of money advice in Britain; It also runs the free National Debtline on or Consumer Credit Counselling Service A charity offering free and independent debt advice to consumers and arranging debt management plans for those with disposable income. It can be contacted on or Providing credit Credit unions co-operative organisations owned and controlled by members which offer saving and loan opportunities to their members. Each credit union has criteria which determine who can join its common bond. This common bond may be that people live in the same area or have the same employer. Further information is available from the Association of British Credit Unions Ltd. An alternative model Some banks and building societies reach low-income groups through an intermediary, such as a housing association. This helps them manage the risk of default (see Housing factsheet for an example). Basic bank accounts Bank accounts without overdrafts or cheque guarantee cards, available for people who may dislike or have difficulty getting other bank accounts. They enable electronic payments (from employers, tax credits or benefits) and direct debits to pay bills. 11

13 ACTION ON DEBT ENDNOTES 1 Based on Quarterly Bulletin Winter 2002 Financial Pressures in the UK household sector (Bank of England, 2002) 2 Financial Risk Outlook 2004 (Financial Services Authority, 2004) p72 3 Kempson, Over-indebtedness in Britain, a report to the Department of Trade and Industry (2002) p15 4 Ibid. p29 13 per cent of households in England and Wales 5 IMPACT Financial Inclusion Forum, Sheffield, field notes 6 Ibid. 7 Kempson, Life on a low income (Joseph Rowntree Foundation, 1996) 8 Jones, P, Access to credit on a low income (2002) p16 and p33 9 Kempson, 2002, op cit., p35 10 In too deep (Citizens Advice, 2003) p72 11 Britain s Poorest Children: Severe and Persistent Poverty and Social Exclusion (Save the Children, 2003) p49 12 Quarterly Statutory Homelessness Statistical Releases, 2003: Quarter 2 (Office of the Deputy Prime Minister, 2003) table 5 13 Through the Prison Gate: a joint thematic review by HM Inspectorates of Prisons and Probation (Home Office, 2001). Prisoner questionnaire results 14 Criminality survey: drugs follow-up (Home Office, 2001, unpublished) Short-sentenced prisoners using drugs prior to prison 15 Fair, Clear and Competitive, The Consumer Credit Market in the 21st Century (Department of Trade and Industry, December 2003) 16 Debt collection guidance (Office of Fair Trading, July 2003) 12

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