What England and Wales can learn from Scotland to tackle problem debt

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Policy in Practice and Financial Inclusion Commission tackle problem debtJust over a year ago the Financial Inclusion Commission called for the UK to become the most financially inclusive society in the world in its report Improving the Financial Health of the Nation.

Since then, Policy in Practice has continued working with the Commission to propose specific measures that will help achieve that goal.

33% of UK households face debt problems

In its latest report, the Financial Inclusion Commission is calling for a new tool to tackle problem debt.

This is a particularly urgent issue given that 8.8 million households, nearly one third of all households in the UK, are facing debt problems.

If nothing is done now to address the issue the effect on those people in debt, and on the country’s economy as a whole, could be profound.

The Commission cites Scotland as a good example of what can be done to help households tackle problem debt.

The Scottish Debt Arrangement Scheme (DAS) is an innovative framework that protects indebted households at the same time as providing incentives and support to help them repay their debts.

Since its implementation in 2004 the DAS has helped thousands of people to deal with their debt problems.

Scottish debtors get better protection

Under the Debt Arrangement Scheme the process usually begins when a person who is struggling to make debt repayments sees a debt adviser.

After deciding that a DAS is the best option for this person, the debt adviser uses a Common Financial Tool to put together a Debt Payment Plan (DPP) that is suitable for the debtor.

A ‘breathing space’ from creditor action, charges and interests is in place while the DPP is being put together.

Once the DPP is approved charges and interests are frozen for as long as the debtor makes repayments – and written off altogether by the end of the repayment process.

By contrast, debtors in England and Wales do not receive the same level of support.

Those who are experiencing temporary difficulties but may eventually be able to repay usually enter a Debt Management Programme (DMP).

This is more of an informal agreement with creditors – while most creditors usually agree to freeze interest, charges and enforcement action, they do not have to.

Instead, Scotland’s DAS guarantees that debtors will be allowed enforceable breathing space if their DPP is approved.

Scottish debtors get enforceable room to breathe

How does this affect debtors in practice?

Firstly, by providing debtors with an enforceable breathing space, it makes it more likely that the will bring their situation under control, recover, and make repayments.

This means that in many cases creditors receive a higher proportion of their debts than when debtors are not protected and end up slipping into bankruptcy.

Secondly, since DAS offers such protections, it encourages debtors to take action before their situation is beyond repair.

But DAS doesn’t suit everyone

This is not to say that the Debt Arrangement Scheme is a perfect scheme for everyone.

Many people will not be able to make regular repayments, and have to use insolvency programmes – which are already strong in England and Wales.

Scotland’s DAS has also been criticised for being administratively complex, and this is something that should be addressed before implementing it in England and Wales.

5 features of a debt support scheme for England and Wales

The Financial Inclusion Commission believes that England and Wales should have a statutory instrument similar to Scotland’s Debt Arrangement Scheme to protect and support debtors.

We are therefore calling on the government to implement primary legislation to make this a reality.

This debt support programme should have the following features:

  1. Enforceable breathing space from charges, interest and creditor action, to allow debtors to recover from unexpected life changes
  2. A freeze on interest, charges and creditor action throughout the repayment process. Any interest and charges should be written off if the repayment programme is completed
  3. Money advice as part of the repayment process, to ensure that debtors receive the support they need to break out of a debt spiral
  4. Use of a Common Financial Tool should be compulsory for all debt advisors putting together a repayment plan, to ensure fairness and clarity regarding how much a debtor can afford to pay back
  5. A single monthly payment, to be distributed across creditors, to make the process as simple as possible to the debtor

Achieving financial inclusion in the UK

We are convinced that applying such a scheme in England and Wales would be beneficial for those with debt problems as well as for their creditors.

There is no good reason why debtors in Scotland should benefit from the support of a robust Debt Arrangement Scheme while those in England and Wales are left to rely on informal agreements with creditors, and far too often slip towards insolvency.

If we are to achieve full financial inclusion in the UK, we must be ready to tackle debts head-on.

Further reading

Policy in Practice has designed software to help support people through the transition to Universal Credit. We also analyse the impact of welfare reform on households to help local authorities target their support programmes where they are most needed.

If you would like to understand more about our work on financial inclusion please email hello@policyinpractice.co.uk.

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