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Government launches ‘Breathing Space’ debt respite scheme: Will it work?

Britons with mounting debts will be able to ask for them to be put on hold for two months after proposals two years in the making came into effect today.

The so-called ‘Breathing Space’ scheme, announced in 2019 after a five-year campaign from debt charities, will allow debtors to apply for a break from any enforcement action from creditors and for interest and fees to be frozen.

The 60-day break from spiralling credit and the threat of debt collectors being sent round is supposed to give borrowers chance to work out their financial situation and options that could help them get out of debt.

Push the red button: The Government’s new ‘Breathing Space’ scheme gives those in problem debt a 60-day break from interest, charges and enforcement action

Prospective applicants can ask for a debt adviser or charity to stop the clock, provided they fulfil the criteria. They must not be on a debt relief order or have an individual voluntary arrangement or be bankrupt when making an application.

Meanwhile, not all debts are included, even if all creditors are told someone cannot make their payments for two months, which could harm their credit score.

This is 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 on credit files.

‘It stopped the phones ringing and helped me sleep at night’ 

26-year-old Jamie, from Sheffield, benefited several years ago from a month-long pause from his creditors which he arranged after seeking debt advice.

Jamie, originally from Wakefield, West Yorkshire, fell into financial trouble in 2014 after being made redundant from his job, while having to care for his mum.

He racked up around £2,000 of debt on three credit cards and an overdraft, which he couldn’t afford to pay back with a combination of benefits and a low-paid job, and racked up interest.

Eventually, he was passed around debt collectors, who bombarded him with calls at work, after which he turned to the debt charity StepChange.

He signed up to a Debt Management Plan, which compiled his debts into one monthly payment, and was able to secure some breathing space for a month from his creditors.

‘Some were happy to give me a month, but I had to provide them with a StepChange reference number, and some weren’t so bothered’, he said, although he managed to a 30-day break with the help of the charity.

‘For that month I used it to get my mental health back, and just to stop the phone ringing. I wasn’t sleeping, and after that I no longer got bombarded with calls. I used it to work out what I could pay.’

However, although the pause helped, he said he would have liked longer.

‘I definitely would’ve preferred three months or so’, he said, ’30 days isn’t always great, that’s only one pay cheque. It gives you time to plan but not to really get yourself back on your feet.’

Fortunately, Jamie finished his DMP around 18 months ago, and now has another job, an improved credit rating, and no credit card debt.

‘I did take out a card with a lower limit but quickly closed it again’, he said, ‘having been in that situation you understand the repercussions.’

Among the debts not included in any arrangement are secured loans like mortgages or second-charge loans, or an advance on Universal Credit payments owed back to the Department for Work and Pensions.

Those who use the scheme are also expected to keep up housing, council tax and utility payments during the two-month breathing space period, and it could be cancelled if they do not.

The Treasury estimated that as many as 700,000 people could take advantage of the scheme in its first year of operation.

Minister John Glen wrote in a blog post for the debt charity StepChange in February 2020 that it could ‘help people develop an affordable long-term plan so they don’t have to rely on quick fixes or high-cost credit.’

The introduction comes as the number of British adults in problem debt totalled 2.4million this January, thanks to the pandemic, according to figures from StepChange. Some 14.3million people experienced a fall in income due to the coronavirus, of which 11.3million said their income had not recovered.

What debt solutions are available? 

Here are some of the terms readers should know in order to get to grips with the conversation around debt:

– Debt Management Plan: an informal agreement for paying back non-priority debts (meaning things like council tax and mortgage bills are excluded) in one monthly payment, for those not struggling quite so much that debts need to be written off. Interest and charges on debts are often frozen during these. They can be free or fee-charging

– Bankruptcy: For those who owe at least £5,000 and have no means of paying it back. Costing £680, it amounts to a declaration that someone can’t pay back their priority and non-priority debts.

– Debt Relief Order: Those who owe less than £20,000 and have less than £50 each month leaving 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 a £90 upfront fee, which regulators warned proved a ‘significant barrier’ to some, usually lasts for a year and can see debts included in it written off afterwards.

Individual Voluntary Arrangement: These have boomed in popularity in recent years amid fears they are being mis-sold as ‘life hacks’. These charge upfront fees of around £5,000 on average and see borrowers signed up to formal and legally binding debt repayment plans which can last 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 called the move a ‘landmark piece of legislation’ with ‘real potential’ to ‘help put people seeking debt advice on the road to recovery.’

He added: ‘It’s hugely welcome that people taking action to deal with their debts will finally get the statutory protection that, to date, has only been voluntary and offered by some, but not all, of people’s 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 and help people struggling with their debts. 

It will be followed by a ‘Statutory Debt Repayment Plan’ in 2024 which will enable debtors to enter into a legally binding agreement to repay their debts.

It also follows an announcement in the 3 March Budget that the Government would allocate £3.8million to pilot an Australian-style system of no-interest loans for hard-up borrowers. 

That move was cautiously welcomed by community lenders and charities, although they said questions remained about how it would operate.

And some also raised concerns about the effectiveness of the new scheme given its limited running time, and the fact debt advisers can often get credit card and loans debts placed on hold for a similar length of time already.

Sara Williams, a debt adviser who runs the blog Debt Camel, told This is Money: ‘Debt advisers wanted the scheme to be six or 12 months long. 

‘That would have given enough time for many people to be able to find another job or sort out repayments to their priority debts.

‘But the current two months breathing space simply isn’t long enough to be useful in many cases.’

Amy Taylor, a debt adviser and chair of Greater Manchester Money Advice Group, said: ‘If part of our advice is that a client could claim benefits, it is likely to take a lot longer than 60 days before they see any improvement in income – for disability benefits, the timescale is currently around six months.

‘There are other issues, such as the change of dynamic between client and debt adviser. We are there to provide independent advice, representation and information, but it imposes obligations on debt advisers and clients. 

‘There has to be regular engagement from the client, they are supposed to keep paying their bills, they mustn’t borrow more than £500, and if they don’t meet these conditions, debt advisers can effectively terminate the breathing space. 

‘This is not how I work as debt adviser and I feel this harms the trust that the adviser/client relationship relies on.’

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 itself. It’s just a pause.’

Williams added: ‘A lot of people who talk to a debt adviser about a two-month break may find the debt adviser suggests they have better options. There may be a good debt solution for you that you could start right away.

‘Or it may only be necessary to talk to one or two creditors and ask for a hold on your account while you get back on your feet.’

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