Britons with mounting debt will be able to demand a two-month hold after proposals in the pipeline for two years came into effect today.
The so-called ‘Breathing Space’ plan, announced in 2019 after a five-year campaign by debt charities, would allow debtors to apply for a break from any enforcement action from creditors and freeze interest and fees.
A 60-day standstill on credit escalation and the threat of debt collectors being sent in is supposed to give borrowers an opportunity to determine their financial situation and options that can help them get out of debt.
Hit the red button: New government ‘breathing space’ scheme gives those with debt problems a 60-day break from interest, fees and enforcement action
Potential applicants can ask a debt counselor or charity to stop the clock, provided they meet the criteria. They must not be under a debt relief order or have an individual voluntary arrangement or be bankrupt when the application is made.
Meanwhile, not all debts are included, even if all creditors are told someone can’t make their payments for two months, which can hurt their credit score.
That’s because unlike the three-month mortgage and credit card payment holidays introduced by the Financial Conduct Authority last year, this 60-day break will show up in credit filings.
“Stops the phones ringing and helps me sleep at night”
Jimmy Evans has taken advantage of a month-long hiatus from his debts
26-year-old Jimmy Evans, from Sheffield, benefited several years ago from a month-long hiatus from his creditors arranged for him after seeking debt advice.
Jamie, originally from Wakefield, West Yorkshire, fell into financial trouble in 2014 after being laid off from his job, while having to look after his mother.
He had accumulated nearly £2,000 in debt on three credit cards and overdrafts, which he could not pay off with a combination of benefits and a low-paying job, and racked up interest.
Eventually, he was passed around debt collectors, who bombarded him with calls at work, after which he turned to debt charity StepChange.
He signed up for a debt management plan, which combined his debts into one monthly payment, and managed to secure some breathing space for a month from his creditors.
“Some were happy to give me a month, but I had to give them a StepChange reference number, and some weren’t too upset,” he said, though he managed to get a 30-day break with the charity’s help.
That month, I used it to restore my sanity, and just to stop the phone ringing. I didn’t sleep, and after that I wasn’t bombarded with calls anymore. I used it to calculate what I could pay.
However, while the hiatus was beneficial, he said he would have loved it longer.
“I would definitely prefer three months or so,” he said, “30 days isn’t always great, that’s just one paycheck. It gives you time to plan but not to really get yourself back on your feet.”
Fortunately, Jamie finished his DMP about 18 months ago, and now has another job, an improved credit rating, and no credit card debt.
“I did take out a minimum card but quickly closed it again,” he said, “since I was in that situation, you understand the ramifications.”
Among the debts not included in any arrangement are secured loans such as mortgages or second mortgage loans, or an advance on universal credit payments due to the Department for Work and Pensions.
Those using the scheme are also expected to continue making housing, council tax and utility payments within the two-month breathing period, and it can be canceled if they do not.
The Treasury has estimated that up to 700,000 people could benefit from the scheme in its first year of operation.
It can ‘help people develop an affordable long-term plan so they don’t have to rely on quick fixes or high-cost credit,’ minister John Glynn wrote in a blog post for debt charity StepChange in February 2020. ”
The introduction comes as the number of British adults in bad debt hit 2.4m in January, thanks to the pandemic, according to figures from StepChange. About 14.3 million people have seen income decrease due to the coronavirus, of whom 11.3 million said their income has not recovered.
What debt solutions are there?
Here are some terms readers should know in order to dominate the conversation about debt:
Debt management plan: An informal agreement to pay off non-priority debts (which means excluding things like council tax and mortgage bills) in one monthly payment, for those who aren’t struggling so much that debts have to be written off. Interest and fees on debt are often frozen during these. It can be free or for a fee
bankruptcy To those who owe at least £5,000 and have no means of paying it back. It costs £680 and is an admission of someone’s inability to pay their priority and non-priority debts.
Debt forgiveness order: Those who owe less than £20,000 and have less than £50 a month making them unable to pay their debts can apply for one of these. These figures could be changed to £30,000 and £100, under proposals from the Insolvency Service.
It comes with an upfront fee of £90, which regulators warn has proven to be a ‘major handicap’ for some, and usually lasts a year and the debts included in it can be written off after that.
– Individual Voluntary Arrangement: Their popularity has boomed in recent years amid concerns that they are being missold as “life hacks”. These charge upfront fees of around £5,000 on average and find borrowers signed up for formal and legally binding debt repayment schemes which can run for five to six years.
They are usually only recommended for those with more than £10,000 in debt.
Source: Citizens Advice
The charity’s chief executive, Phil Andrew, described the move as “landmark legislation” with “real potential” to “help put people seeking debt advice on a path to recovery”.
He added, “It is very welcome that people who take action to deal with their debts are finally getting the legal protections that hitherto have been only voluntary and provided by some, but not all, individual creditors.”
The 60-day freeze is the first in a two-part government proposal, included in the Conservative Party’s 2017 election manifesto, to try to help people struggling with their debt.
It will be followed by a “statutory debt repayment scheme” in 2024 which will enable debtors to enter into a legally binding agreement to pay off their debts.
It also follows an announcement in the March 3 budget that the government would allocate £3.8m to pilot an Australian-style zero-interest loan scheme for die-hard borrowers.
Community lenders and charities have cautiously welcomed the move, although they said questions remain about how it will work.
Some have also raised concerns about the new system’s effectiveness given its limited run time, and the fact that debt counselors can often get hold of credit card debt and loans outstanding for a similar period of time already.
Debt counselors wanted the scheme to be six or 12 months long, Sarah Williams, a debt counselor who runs the Debt Camel blog, told This is Money.
This would have given enough time for many people to be able to find another job or settle their priority debt payments.
“But the current two-month breathing space is not long enough to be useful in many cases.”
Amy Taylor, debt counselor and head of Greater Manchester Financial Advice Group, said: ‘If part of our advice is that a customer can claim benefits, it is likely that it will take much longer than 60 days before they see any improvement in income – for disability benefits it is The date range is currently about six months.
There are other issues, such as changing the dynamic between client and debt counselor. We exist to provide independent advice, representation and information, but they do impose obligations on debt advisors and clients.
There needs to be regular interaction from the client, they are supposed to keep paying their bills, they shouldn’t borrow more than £500 and if they don’t meet these conditions debt counselors can effectively end their breathing period.
“This is not how I operate as a debt counselor and I feel this is damaging to the trust on which the counselor/client relationship depends.”
She added: ‘There may be nothing different in the client’s circumstances at the end of the scheme and no particular debt solution to go to. Breathing space is not a debt solution in and of itself. It’s just a pause.
Williams added: “A lot of people who talk to a debt counselor about a two-month break may find that the debt counselor indicates they have better options. There may be a good debt solution that you can start right away.”
“Or it may just be necessary to speak to one or two creditors and demand that your account be suspended while you get back on your feet.”
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