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In too deep

21 May 2003
In too deep cover

CAB clients' experiences of debt

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In too deep [ 0.58 mb] - CAB clients' experiences of debt

Executive summary

1. Since 2000, there has been a debate between the credit industry, consumer organisations and the Government as to whether the UK is facing a problem of personal indebtedness. Over the last five years, Citizens Advice Bureaux UK wide have reported a substantial increase in the number of new debt enquiries. They are now dealing with well over a million new debt enquiries per year.  There has been a marked growth in the number of new enquiries about consumer credit where enquiries have risen by 47 percent over the five years to 2002. Consumer credit debt enquiries now form nearly two-thirds of all new enquiries about debt made to Citizens Advice Bureaux. Other advice providers have also reported a rise in the number of people contacting them for help with debt problems.

2. The increase in the number of people seeking help about their debt problems could be strongly related to economic boom. For many people, low rates of unemployment, low interest rates and soaring house prices have resulted in a substantial increase in mortgage and consumer credit lending. However lenders’ figures appear to show that the indebtedness problem may be limited; for example the proportion of accounts in arrears has remained the same for the last 5 years.

3. In order to understand more about the reasons for the increase in the number of new debt enquiries, the CAB service decided to undertake a major piece of research to find out more about the problems faced by our debt clients. In May 2001, a 10 percent sample of bureaux UK-wide were asked to survey their new debt clients in that month.  Over 900 people participated in the survey. The research found that:

  • CAB debt clients are most likely to be of working age.  Only a small proportion of debt clients were over pensionable age. CAB debt clients are particularly poor, with high proportions of people in receipt of means-tested benefits and tax credits and many being tenants of social landlords. The average monthly income of debt clients was less than half of that for the UK population as a whole.
  • There has been a dramatic shift in the types of debts about which CAB debt clients are seeking advice over the last ten years.  A decade ago, Citizens Advice Bureaux were dealing with clients who had as many priority debts (debts where the ultimate sanction for non-payment is imprisonment, loss of home, disconnection of fuel supply or repossession of essential goods on hire purchase) as credit debts, notably mortgage arrears and community charge arrears.  Now CABx are dealing with people who have considerably higher numbers of credit debts. Low income and the number of credit cards, bank and finance company loans had the most effect on the size of the clients’ total debt.
  • The total household debt amongst CAB clients ranged from £132 to £111,000. A significant proportion of clients faced debts in proportion to their income which were totally unmanageable, on average nearly 14 times their monthly income. Those people living in rural areas, owner occupiers and non-householders had particularly high levels of debt relative to their income.
  • The survey also found that certain debts were linked to poverty. Women, tenants of social landlords and the unwaged were most likely to have debts associated with poverty, such as catalogue debts and loans to home-collected credit providers. Interest rates associated with these types of borrowing were significantly greater than for so-called mainstream sources of credit. Few CAB debt clients had debts to the social fund, and CAB evidence often points to unfair refusals of applications to this fund and the problems that very high rates of repayment cause.  
  • A high proportion of clients had bank overdrafts. This is of concern because a bank can take an unfair advantage to recover debts to itself if the debtor is still using this bank account to receive wages and benefits.  
  • Debt problems can be exacerbated by inappropriate collection methods, including the use of administration charges. The survey found that consumer credit lenders were much less likely than priority creditors to use court action to recover debt, relying instead on the use of debt collection agencies. CAB evidence often shows that debt collection agencies use harsh and unfair methods to collect debts. Therefore effective measures are needed to tackle unacceptable debt collection techniques.
  • Where court enforcement is used to recover the debt, CAB evidence shows that some types of enforcement have a harsh impact on vulnerable people in debt.
  • Administration charges can make debts spiral out of control. Although it may be reasonable to add charges for the additional cost of administering an account in arrears, the charges should be proportionate to the cost. And where creditors are charging high interest rates and APRs based on assumptions about the risk of non-payment, it is arguable that consumers who incur contractual charges for recovery letters and visits are effectively being charged twice.
  • Social landlords and local authority council tax departments were most likely to use court action to recover debts. Citizens Advice Bureaux report that social landlords and council tax departments are taking a tougher line on the collection of rent and council tax arrears, even though poor housing and council tax benefit administration may be partly to blame for increased arrears. This indicates that action to tackle debt problems should include measures to improve collection practices for rent and council tax arrears.
  • Because few creditors had taken court action to recover the debts, many of the clients were unable to access insolvency remedies, including administration orders in England and Wales and sequestration in Scotland. Action should be taken to ensure that more people with problem debts can obtain protection from further enforcement action by their creditors and make affordable repayments to reduce their debts.
  • CAB clients get into debt problems for a variety of reasons. Of these, a change in circumstances, such as job loss, ill health and relationship breakdown, and overcommitment and poor money management were the most important.
  • A high proportion of clients reported a change of circumstances involving loss of income or increased expenditure as a reason for debt. However when the actual financial effects of these changes were ascertained, in a significant proportion of cases the amount of change in income expenditure was relatively small, around 10 per cent of annual income. This suggests strongly that for a proportion of CAB clients with debt problems the level of their commitments relative to their income was such that a relatively small change turned what were previously manageable payments into debt problems.  
  • CAB evidence also shows that payment protection insurance, which might be expected to protect people from the effects of unexpected changes in circumstances, just does not help to resolve many of the debt problems which CAB debt clients face. This is most often because the changes experienced are outside the scope of such insurance policies or the causes are specifically excluded.  
  • The impact of unmanageable debt on an individual’s life can be overwhelming. By the time they sought advice from the CAB, nearly 40 percent of the clients said that they felt they could not cope and were feeling in crisis. Most clients had tried at least one method of coping with their debt problems before seeking advice from the CAB. However it is worrying that over half of the debt clients were trying to cope with their financial situation by either using their existing sources of credit or taking out additional borrowing.  
  • Although half the debt clients had tried to negotiate reduced payments with their creditors themselves before seeking advice from the CAB, most had not received sympathetic responses from their creditors.
  • It was of particular concern to find that a quarter of CAB debt clients were already seeking treatment for stress, depression and anxiety from or via their GP. Just under half of those who were receiving medical treatment for their depression felt that their symptoms were caused by their debt problems.
  • In many cases, CAB debt clients reported that the impact of debt on their lives had been devastating. Relationship breakdown, feelings of isolation and the stress of living on a tight budget had affected them deeply.

4. Recent research for the Financial Services Authority suggests that as many as 6.1 million households face moderate difficulties paying their current credit and other commitments.  It is therefore important that initiatives to tackle debt are effective.

5. A sustainable strategy for preventing overindebtedness and resolving debt problems when they do arise, needs to cover a wide range of issues to be fully effective.  Initiatives which tackle irresponsible lending and borrowing, the level of benefits, take up of benefits and, for those in work, tax credits, lack of access to affordable credit, poor benefit administration, low pay and employment instability, as well as employer compliance with employment protection legislation, and access to advice all have a part to play in the prevention and resolution of debt problems.  

6. Although there are a multitude of governmental and other initiatives, the CAB service feels that they will not be effective for the following main reasons:

  • some initiatives are only proposals and have yet to be implemented or get close to implementation
  • where self-regulation is relied on, this only covers those traders who subscribe to trade association codes of practice, and is only useful if there is effective monitoring of compliance
  • iImportant issues related to overindebtedness are not included in some key governmental or other initiatives, for example the recent reforms of bankruptcy legislation do not address the inability of many CAB debt clients on means-tested benefits to afford the deposit fee to become bankrupt
  • some initiatives are insufficient to deal with the problem they are attempting to address, e.g. there is a gap between the funding required to provide free, independent and impartial money advice and the money available
  • eExternal events may prevent some governmental initiatives from being put into practice, for example the EC draft directive on consumer credit may frustrate the UK government’s review of the Consumer Credit Act
  • tThere is limited overall co-ordination of policy and action.  

7. The CAB service recommends that a crosscutting governmental review should result in a full assessment of all strategies to tackle the problem of debt and develop strategies to fill any gaps, and to monitor whether further action is needed to tackle emerging trends.

8. Our other recommendations to tackle the problem of debt effectively are set out in Chapters 8 to 12.

In too deep [ 0.58 mb] - CAB clients' experiences of debt