People in serious debt could be given a six-week grace period where they are not charged interest, penalty fees or threatened by enforcement action in order to get their finances back on track.
The Treasury, which unveiled the proposals today, said the six-week ‘breathing space’ would give people ‘time and opportunity’ to seek debt advice, draw an informal debt repayment plan or explore debt write-off options with its creditors.
The proposed plans, which will be discussed over the next year, come as the level of household debt in Britain have surged over the past two years, despite having declined after the financial crisis.
Households in the UK are increasingly at risk of getting into debt as inflation accelerates but wages stagnate.
The Bank of England’s latest figures show British households have racked up unsecured debts of £203billion on credit cards, car finance, overdrafts and other loans. This is within touching distance of the £208billion peak as the financial crisis arrived.
‘For many people in the UK problem debt seems impossible to escape. Its effects can be far-reaching, impacting all aspects of a person’s life and leaving them feeling helpless,’ the economic Secretary to the Treasury, Stephen Barclay, said.
‘That is why we are working to give people who are overwhelmed by debt more time to seek advice, find a workable solution, and help get their lives back on track.’
The Treasury said that in Scotland people in debt entering into repayment plans have a statutory right to have their fees and interest frozen under the Scottish ‘debt arrangement scheme’.
The scheme provides a six-week ‘breathing space’ for debtors looking to set up a repayment scheme, followed by a statutory repayment plan. However, there is currently no equivalent scheme elsewhere in the UK.
Households in the UK are increasingly at risk of getting into debt as inflation accelerates but wages stagnate: prices are currently rising at 3 per cent, the highest since 2012, but wages are up just 2.1 per cent in the past year.
Gillian Guy, chief Executive of Citizens Advice welcomed the proposals but said that more had to be done to stop people getting in ‘problem debt’ in first place – for example stopping credit card providers from raising people’s credit limit without them requesting it.
Debt problem is when arrears take up an excessive proportion of income, placing a heavy burden on individuals and families.
Guy said: ‘It’s good to see the government taking action on problem debt – an issue we help thousands of people with every week.
‘Providing breathing space is one way to help people get back on track, but action must be taken to stop them getting in problem debt in the first place.
‘That’s why we’re calling for an end to irresponsible lending from credit card companies. For example, no one should have their credit limit raised without them requesting it – something which risks pushing them further into debt.’
Unsecured debts: British households have racked up unsecured debts of £203billion on credit cards, car finance, overdrafts and other loans
Old Mutual Wealth responsible business director Jane Goodland said the proposals were only treating the symptoms of the problem, which she identified in a general lack of knowledge of financial matters.
She said: ‘These measures are admirable and will help protect vulnerable consumers. Nonetheless, they are a sticking-plaster to the symptoms of a lack of knowledge and capability when it comes to managing our financial lives.
‘Last week’s FCA survey of consumer financial wellbeing highlighted yawning gaps in our financial knowledge, and these need to be addressed in order to empower people to enhance their own financial health.
‘In order to tackle the root cause of financial struggle, more needs to be done to improve financial capability across the board, starting with an effective programme of financial education integrated into the primary school curriculum.’
