Breathing Space: call for evidence

Breathing Space: call for evidence The Children's Society's response The Children's Society The Children s Society is a national charity that runs local services, helping children and young people when they are at their most vulnerable, and have nowhere left to turn. We also campaign for changes to laws affecting children and young people, to stop the mistakes of the past being repeated in the future. Building on our 136-year history of tackling child poverty, we continue to engage with decision makers to help disadvantaged families get the support they need to escape poverty and debt, giving their children the best start in life. In 2016/17 we worked with over 13,000 vulnerable children and young people in our services. We see the impact of problem debt everyday on the children, families and young people we work with. In recent years, we have undertaken a significant amount of research into the issue of problem debt, some of which we have worked on in partnership with StepChange Debt Charity and other organisations. This evidence and experience informs our response and encourages us to want to work with the Government to help make this scheme the best it can be. Introduction 1. The Government's commitment to a 'breathing space' scheme and statutory repayment plan option is welcome news, but it must provide the right support for families in debt. 2. The proposed scheme has two distinct, but equally important phases: Phase 1: Initial six-week breathing space period where protection from creditors is provided in order to allow a debtor time to seek debt advice. During this period an adviser can help the debtor make arrangements for a suitable debt solution. Phase 2: A statutory repayment plan option may be the right solution for some debtors, where a debt adviser considers there is a realistic prospect that they will be able to repay their debts in full over a reasonable timeframe. This phase provides similar protections from creditors while agreed repayments are made over time. 3. The goal of the scheme should be to support families in problem debt back onto a sustainable financial footing, helping them repay their debts in full over time where that is appropriate. The opportunity must not be missed to ensure the scheme is as effective as possible at achieving this core purpose. We believe that the six key principles described in detail below will help do this. 4. Following this, we respond to each individual question in the call for evidence, referring back to relevant material where it has already been covered within our six principles and including additional material where necessary. childrenssociety.org.uk Policy, Research and Public Affairs Team 1

Principle 1: A six-week breathing space is helpful, but there must be no gap in protection before a repayment plan is in place 5. A six-week breathing space for families in problem debt is a positive and welcome measure. It will provide time and protection to enable many families to seek professional advice without overbearing pressure from creditors demanding payment, or increasing financial stress from mounting interest and additional charges. 6. The protections of the breathing space period (which we discuss more fully in paragraphs 46 to 52 below) will also help encourage debtors to get the advice and support they need earlier than they might otherwise, helping to deal with the problem before it becomes greater. Obtaining advice and having time to properly assess options with a debt adviser is the first crucial step to being able to get back onto the right financial footing. 7. A six-week initial breathing space period will also allow a debt adviser to help many families put arrangements in place for a suitable long-term debt solution. For some this might be a form of structured repayment plan; for others the debt problem may be too big and an insolvency option would be best; for yet others the debt adviser may, following budgeting advice, be able to recommend that the client can resume normal repayments without any further formal procedure. There must be no gap in protection between the two phases of the scheme 8. A form of breathing space scheme is already available in Scotland through the Debt Arrangement Scheme ( DAS ), which consists of a six-week debt moratorium followed by the option of a statutory debt payment programme. 9. Evidence from Scottish debt advisers indicates that the DAS's initial six-week moratorium is too short for many people to seek debt advice and put in place a suitable debt repayment plan. StepChange Debt Charity clients in Scotland take on average 120 days to complete the process of seeking debt advice, choosing DAS as a solution and submitting an application for a DAS repayment programme 1. 10. This suggests that there are likely to be circumstances where some clients may need longer than six weeks to implement a statutory repayment plan. It means that some people could face a gap in protection from creditors between the end of the six-week initial breathing space period and the start of the statutory repayment plan. 11. We believe there should be no gap in protection between the two phases of the scheme because this puts the debtor at risk of falling back into problems under premature pressure from creditors. 12. An initial breathing space period that was longer than six weeks would, therefore, probably be helpful in reducing the number of cases where the protection period falls short of what is required to put in place a repayment plan. 13. However, assuming the initial breathing space period is six weeks, a way to ensure that there is no gap in protection would be to make the initial breathing space protection extendable on a case-by-case basis up to the date a repayment plan starts. childrenssociety.org.uk Policy, Research and Public Affairs Team 2

14. This could be achieved, for example, by allowing a 'roll-over' (on the recommendation of a debt adviser) into a subsequent short breathing space period if a repayment plan is being arranged but needs more time to be finalised. Subsequent roll-overs could be used as necessary. 15. It should be noted that the need for this type of roll-over mechanism depends to some extent on the length of the initial breathing space period. The shorter the default initial breathing space period, the greater the need for use of some form of case-by-case extension option in order to ensure that protections continue until a repayment plan is in place. Government review after 12 months 16. The Government should review the scheme after its first year of operation. This should include reviewing how well the initial breathing space arrangements are working, including the six-week period and any roll-over mechanisms. 17. This review should have meaningful input from the debt advice sector and families who have used the scheme, in addition to creditors. Principle 2: A statutory repayment plan with flexibility to manage temporary shocks is crucial 18. The statutory repayment plan option is a vital part of these proposals, as this is what offers the long term sustainable solution. It allows the debtor the protection and stability to repay their debts in full, while giving creditors more certainty. 19. It is crucial that this component provides the debt adviser with the necessary flexibility to put in place the most effective plan for each family's circumstances. Flexibility to deal with temporary shocks effectively 20. 70% of StepChange Debt Charity clients say the main cause of problem debt was job loss, reduced work income, illness, relationship breakdown or business failure 2. 21. Evidence from The Children's Society and other organisations 3 finds a range of examples of 'negative life events': Temporary shocks that can trigger a debt problem, including bereavement, cancer treatment, financial abuse in abusive relationships, and periods of poor mental health. 22. These circumstances can make it impossible in the short term to make any debt repayments, but once things settle down most families will return to a position where they can make significant debt repayments. 23. Evidence from StepChange Debt Charity 4 demonstrates how financial circumstances can recover significantly after temporary financial setbacks. A type of voluntary solution some debt advisers currently use - known as 'Token Payment Plans' ('TPPs') - involve a debtor paying creditors a nominal 1 monthly to get through a difficult temporary period. childrenssociety.org.uk Policy, Research and Public Affairs Team 3

Of StepChange clients on TPPs who had income solely from benefits at the point they sought advice, around 44% had some or all income from employment at their review stage (up to 12 months later); their income increased by over 500 per month on average. Of those who had income from employment at the start, 90% were still in work at review (up to 12 months later); their income increased by almost 120 per month on average. 24. To be useful, the statutory repayment plan must therefore have the flexibility to work effectively for people experiencing these kinds of temporary shocks. Temporary 'token payment periods' 25. One way of achieving this necessary flexibility would be to allow a debt adviser to start the statutory repayment plan with a period of nominal 'token payments', allowing a shortterm shock to pass before full repayments begin. 26. This would enable a debt adviser to effectively deal with the 'temporary shock' scenario, such as where a debtor has got into debt as a result of losing their job, but expects to be able to find a new job within a few months. Although the debtor cannot make any payments at the moment due to their temporarily reduced income, there is a realistic expectation that income will increase in the near future, allowing them to start repayments at that point. 27. It could even be possible in this scenario for the debt adviser to project and agree the full repayment plan structure upfront, including an initial token payment period. The projected future full payments would then be reconfirmed once the temporary shock has passed, or revised if appropriate. 28. In fact, this highlights a good principle for the statutory repayment plan: It should not be thought of as simply a 'one-off' moment that results in an unchangeable plan lasting many years without future engagement. It should, rather, be thought of as an ongoing period of engagement where the repayment plan remains 'live' and able to adapt to circumstances throughout the life of the repayment period if necessary. This principle, of course, cuts both ways: If a debtor disengages from any scheme requirements then their repayment plan could be terminated. 29. In addition to the ability to start the plan with token payments, the option to apply a temporary token payment period at any point during the repayment plan period in response to an unexpected temporary shock should be considered. This would prevent a repayment plan that might have been running successfully for years from suddenly collapsing due to a temporary problem arising at a point well into the plan period. 30. There is already precedent for this type of flexibility from the Scottish DAS, where payments can be suspended for up to six months at any time within its debt payment programme phase (subject to certain conditions). Safeguards within a temporary token payment period 31. Any temporary period of token payments should be no longer than necessary, and could be subject to a range of potential safeguarding mechanisms, such as: childrenssociety.org.uk Policy, Research and Public Affairs Team 4

i) Limit on the duration of each token payment period and/or a cumulative maximum time available for use during the whole repayment plan. ii) Mandatory regular 'check-ins' with the debt adviser within any temporary token payment period to ensure progress is being made in the right direction. iii) At any check-in, a duty on the debt adviser to recommend resuming full payments as soon as appropriate, i.e. once the situation has stabilised sufficiently to allow steady and sustainable full repayments to begin. Similarly, if a check-in found there was no longer a real likelihood of the debtor being able to repay debts in a reasonable timeframe then an exit into an alternative debt solution should be advised. iv) Duty on the debtor to check-in with the debt adviser as soon as they have a change of circumstances within the token payment period, such as an earlier than anticipated material rise in income. v) Ability for the debt adviser to recommend a one-off payment to creditors within the token payment period if the debtor has an unexpectedly high income surplus in any particular payment period. Principle 3: All debts should be covered, with particular types of debt prioritised 32. The Children s Society has found that it is not so much the amount owed by households that directly impacts on children s wellbeing, but rather the number of creditors they owe money to 5 (the impacts of problem debt on children is covered in more detail in paragraphs 64 to 70 below). Our research also shows that most families are juggling a range of debt types, with four different kinds of debt on average 6. StepChange Debt Charity clients have around six creditors on average 7. 33. Unless most debt types can be included in the breathing space scheme it would fail to be effective. Excluding some creditors means they could continue putting unhelpful pressure on debtors to pay their debts ahead of those included in the scheme. In addition to the ongoing stress on the debtor, this diverts funds into their ongoing budget requirement from the amounts available to make scheme payments. This reduces the viability of a repayment plan in the first place, is unfair to other creditors and increases the risk that a scheme becomes acrimonious and ultimately unsuccessful. 34. Furthermore, due to the range of debts that families commonly have, this problem would probably affect a large number of debtors, reducing the usefulness of the scheme to many families if all debts were not included. 35. The most common sources of problem debt include arrears on energy bills, bank loans, council tax and payday loans 8. However, other debt types are also prominent when considering the levels of difficulty faced by those in problem debt when dealing with their creditors. Research shows that government creditors had some of the worst 'unfairness' scores of any type of organisation. In a survey of clients 9, StepChange Debt Charity found that local authorities ranked second only to bailiffs in terms of unfair treatment. The Department for Work and Pensions ranked third worst and HM Revenue and Customs ranked fifth worst. 36. The enforcement action that can result from missed payments of Council Tax can be very serious, with committal to prison at the extreme. The Children's Society has found childrenssociety.org.uk Policy, Research and Public Affairs Team 5

that almost 20% of families in council tax debt had been visited by a bailiff 10. Over half of parents visited by bailiffs tell us their children were present in the house every time or most of the time and children who have been visited by a bailiff are over three times more likely to hold back from asking their family for things because they worry they would struggle to afford them. 37. For the reasons above, the general principle should be that all debts existing at the date the debtor seeks advice should be included in the scheme. This must include public debts to national government (such as those arising from the tax and benefit systems), local government (such as council tax and local authority housing rent) and other public bodies. Payment of 'continuing liabilities' 38. A family will have certain continuing obligations that accrue after the date they enter the breathing space scheme, such as ongoing rent, utility and insurance payments. These 'continuing liabilities' should not be covered by the scheme protections as they can be considered new obligations arising from continuing services received. The non-arrears balance of contractual payments towards a mortgage or secured loan would also be classed as continuing liabilities. 39. Payments of continuing liabilities should be budgeted for in the applicant's ongoing budget and affordability assessment. For the avoidance of doubt, arrears on these items that existed before the family enters the scheme would be covered by the scheme protections. Priority debts within the scheme 40. Some existing debts should be treated differently under the scheme. The highest priority should be given to debts where the creditor has an ability to withdraw vital services that could have a significant negative impact on the family, potentially leading to even more disruption and instability. Rent arrears are the key example: A private landlord could decide to issue a section 21 eviction notice unless rent arrears are repaid ahead of other creditors. Evidence from Scottish debt advisers 11 shows how this has been a problem in the DAS scheme, where rent arrears must be included in the scheme. 41. Debts of this nature should be included within a scheme, but with the highest priority payment status. This would reduce the potential exposure of families to devastating creditor action such as eviction. 42. Any prioritisation of such debts should not be discretionary and should be specified within regulations. This is to ensure fairness for all creditors, to reduce challenges to schemes from creditors who are not prioritised, and to reduce the vulnerability of debtors. 43. The key criterion for affording this highest priority payment status is whether it is necessary in order to minimise potential significant harm to a debtor. In the case of private landlords, a section 21 eviction notice can be served on a tenant for any reason childrenssociety.org.uk Policy, Research and Public Affairs Team 6

whatsoever so is not an 'enforcement action' that can be protected against under this scheme. 44. We also believe that some priority (although with not as high a status as for the debt types described in paragraphs 40 to 43 above) should be given to debts that would generally be prioritised in a voluntary debt management plan under current best practice guidance for regulated debt advisers. These are usually debt types where the creditor is allowed to use some form of enhanced recovery or enforcement mechanism, such as 'Third Party Deductions' ('TPDs') from welfare benefit payments. An example would be council tax arrears which (under existing voluntary debt management plans) most debt advisers following current best practice would recommend a debtor prioritises. This is so as to avoid the impacts of the particularly strong enforcement actions available to recover council tax, which include TPDs and ultimately a prison sentence. 45. Although the introduction of a statutory breathing space scheme would prevent these enforcement actions being used, we believe it is fair for these types of creditors to retain a higher priority than other unsecured creditors who will already have accounted for their more limited enforcement options through higher lending rates. Principle 4: All interest, fees, charges and enforcement action should be frozen throughout both phases of the scheme 46. Research from The Children's Society 12 shows how for too many households, debt repayments and creditor demands spiral into unmanageable situations which can devastate lives. Mounting interest, fees, charges and enforcement action play a big role in this 'debt trap'. Families need support to halt this downward spiral by being protected from ever growing debts and demands for payments. 47. 60% of StepChange Debt Charity clients said that their financial situation stabilised once all of their creditors agreed to freeze further interest, charges and enforcement action. But no one said their finances had stabilised in cases where creditors had not agreed to give this help 13. This demonstrates how important these protections are to avoiding worsening debt problems and beginning the process of getting out of debt. 48. When the right help is not received, the debt trap is likely to worsen. Around 60% of StepChange Debt Charity clients that did not get help they needed from their creditors went on to take out more credit to try and cope with their debt problems. 29% said that a creditor s demands prompted them to pay that bill and fall behind on other bills and 28% said the associated stress made it harder for them to apply for new or better paid work 14. 49. Other StepChange Debt Charity research 15 has highlighted how creditors continuing to add further interest and charges make recovery from financial problems more difficult: 52% of clients said creditors and debt collectors continued to add fees and charges after they knew the person was seeking debt advice; 68% said that default charges made their debt problems harder to deal with; 62% said that creditors and debt collectors continued to add fees and charges despite knowing the person was in financial difficulty. 50. Evidence from a coalition of debt advice and other charities 16, including The Children's Society and StepChange Debt Charity, shows how charges such as bailiff fees can childrenssociety.org.uk Policy, Research and Public Affairs Team 7

continue to cause small arrears to spiral into much larger debt problems. A small council tax debt can now have 420 or more in bailiff fees added within just a few months. 51. Finally, a survey of users of the Scottish DAS scheme has highlighted how freezing interest, fees and charges gives clients clarity on the debt being repaid and provides a clear incentive for getting advice (see paragraph 80 below for further detail). 52. For the reasons above, we believe it is vital that all interest, fees, charges and enforcement action are frozen throughout both the initial breathing space period and the statutory repayment plan for the scheme to be effective at achieving its aims. Principle 5: Eligibility based on an assessment of affordability by a debt adviser, properly accounting for the vulnerability of families with children Established debt advice models 53. An established and well-regulated independent debt advice sector, including free-toclient services, already provides millions of people with professional debt advice each year. Advice is generally based on an affordability assessment, following industry guidance such as the 'Standard Financial Statement' developed by the debt advice and creditor sectors. This provides a consistent and thorough standard framework for assessing a client s expected income, living costs, levels of debt, and other factors. 54. Currently, the assessment could - depending on the client's circumstances - result in for example the recommendation of a voluntary debt management plan to repay the debt in full, or other options such as insolvency solutions. 55. A breathing space scheme would make a much needed additional option available to debt advisers. It would fill a gap in the range of tools currently available and would be more appropriate and effective in many scenarios. It is likely to be particularly relevant where a family has got into problem debt following a financial shock resulting from a temporary external factor such as job loss. Access to statutory repayment plan via regulated debt adviser 56. The key eligibility test for access to the breathing space scheme should be whether it is the most appropriate solution given the financial circumstances of each particular applicant. There should be no general exclusions based on debt or debtor characteristics. 57. Thinking first about the statutory repayment plan phase, the right way of providing access to this is therefore to allow a suitably qualified independent debt adviser to make a professional assessment of the applicant s ability to make debt repayments in the short and long term. The adviser could recommend a statutory repayment plan where they judge it to be the most appropriate response. 58. Equally, a debt adviser should not recommend the scheme where this would not be in the best interests of the client. Where the debtor s financial situation is not expected to childrenssociety.org.uk Policy, Research and Public Affairs Team 8

improve within a reasonable timeframe, or debt repayments would be unaffordable in the long run, a debt adviser might consider an insolvency procedure (such as bankruptcy or Individual Voluntary Arrangement) to be more appropriate. 59. We believe that an independent debt advice professional is best placed to judge the viability and suitability of a scheme for each individual's circumstances. We therefore suggest that an individual's repayment plan should be deemed approved on the basis of a recommendation by a regulated debt adviser, subject to any objections from creditors received within a fixed time period. 60. Debt advisers are already regulated by the Financial Conduct Authority (FCA) but regulatory requirements for advice agencies wishing to help access the new scheme should be reviewed to ensure the appropriate professional standards remain at the right level. 61. The FCA could also act as the independent appeal body for objections raised by creditors to any individual's proposed scheme. 62. If creditors appeal, the protections provided by the breathing space should be applied throughout the appeal period and extended until the appeal decision has been made. The affordability assessment 63. The debt adviser's affordability assessment should follow the Standard Financial Statement and associated budgeting guidelines described above. This should be cited in regulations or statutory guidance. 64. Taking a 'belt and braces' approach to ensure adequate protection for children, regulations should specify that the affordability assessment must properly factor in the additional financial vulnerability associated with having dependent children. This is primarily for the following reasons (which are explained more fully in the paragraphs below): Being responsible for children brings additional costs that could risk being left out of affordability assessments if not done comprehensively. Families with children are more likely to be in problem debt 17 and on a low income 18 than families without children. Families with children tend to have less flexible or discretionary expenditure, particularly on items that can affect the welfare of the children 19. Problem debt has a significant negative impact on the wellbeing of children 20. 65. The Children s Society estimates there are 1.4 million families with 2.4 million children living in problem debt in the UK (defined as being in arrears on at least one payment obligation). Our research has shown that families with children are more than twice as likely to have experienced problem debt in the last year than families without dependent children 21. 66. Other studies have also shown that the presence of children is overwhelmingly associated with a greater likelihood of financial difficulties 22. Similarly, the FCA recently found that, of the one in six people with outstanding consumer debt who were in financial distress, these were more likely to include younger people and those with children 23. childrenssociety.org.uk Policy, Research and Public Affairs Team 9

67. Our evidence also suggests that creditors are not considering how the presence of dependent children can increase a household s vulnerability 24. 68. The impact of household debt on family finances can be significant. We recently found that over 600,000 families in England and Wales are spending more on overdue bills than they spend on food, with families facing problem debt spending nearly 20% of their income on repaying arrears 25. 69. We have also undertaken a lot of research into the consequences of debt for children. This has found that problem debt has a significant impact on children's wellbeing, with those in families in problem debt five times more likely to be at risk of having low wellbeing than those not facing difficulties with debt 26. 70. Many of these children are struggling with schools, being bullied as a result of their families financial situation 27 and suffering anxiety, stress or depression as a result of enforcement action by creditors 28. Our research also shows that families trapped in problem debt are more than twice as likely to argue about money problems, leading to stress on family relationships, and causing emotional distress for children 29. Access to initial six-week breathing space period 71. Further careful consideration should be given to the access rules specifically for the initial six-week breathing space period. In particular, there is a good case for a 'lighter touch' approach for this initial period for the following reasons: This initial six-week period is relatively short and primarily an interim protection period until a comprehensive debt solution can be arranged. One of the aims of this initial six-week period is to provide protection at a critical and highly stressful moment. Being able to access the protections as quickly as possible is important for its effectiveness at achieving that aim. Making the protections of the initial six-week period as accessible as reasonably possible, on the condition this occurs alongside some form of debt advice, will encourage more families to seek the support that will help them resolve their problem debt. FCA rules 30 already stipulate that firms they regulate must suspend the active pursuit of recovery of a debt from a customer for a period of thirty to sixty days if the customer informs them that they are developing a repayment plan. So creditors such as banks and credit card providers already operate under rules that give access to a form of 'breathing space' for a similar period, with very little requirements put on the debtor. 72. An example of a possible approach would be to allow a customer to access the initial six-week breathing space by engaging in a more limited initial assessment with a general advice provider. If deemed appropriate to go to the next stage, this adviser could activate the initial breathing space protections on the condition that further more specialised debt advice is sought. They would then be signposted to an appropriately regulated debt adviser to undertake the full affordability assessment and determine the longer-term debt solution. 73. Another option could be to follow an approach similar to the DAS model, which allows the six-week moratorium to be accessed directly by the debtor via a simple application form to the Accountant in Bankruptcy (the Scottish Government's insolvency service). childrenssociety.org.uk Policy, Research and Public Affairs Team 10

74. However, due to the importance of getting early debt advice (described further below under Principle 6), we believe that scheme access arrangements that encourage takeup of debt advice are preferable. Principle 6: Maximise accessibility and support for families with children Not enough families are seeking advice for problem debt, nor early enough 75. We know that debt has a negative impact on children (see further detail in paragraphs 64 to 70 above), but families often do not seek debt advice nor receive the right help when they do. Some estimates suggest that only 17% of people who are over-indebted seek advice to help deal with their debts 31. 76. Furthermore, most of those who do seek advice do not do so early enough. Around half those seeking help from StepChange Debt Charity had been worrying about debts for a year or more before seeking advice 32. 77. Our own research found that 84% of families with problem debts felt that they would have liked to have received more support, or to have received support at an earlier stage 33. There are many reasons why people may fail to seek support with their debts. For example, the psychological effects of being in debt can include a distinct phase of denial of the problem which can be a critical barrier to receiving early support. 78. We also found, for example, that only 10% of parents in council tax debt were signposted to independent debt advice by their local council 34. 79. Research on StepChange Debt Charity s clients 35 found that 80% said their anxiety reduced after receiving advice and nearly half said their family relationship had improved. In addition: 32% of those out of work said debt advice made it easier for them to apply for a new job and a similar level said debt advice made it easier to sustain a new job. 83% of those in work said debt advice made it easier to sustain their current job. 80. Furthermore, a survey of clients who have used the Scottish DAS scheme 36 found that freezing interest, fees and charges gives clients clarity on the debt being repaid and provides a clear incentive for getting advice. 81% felt the protections offered under the scheme had made it easier to pay debt and 72% said their finances had stabilised as a result. 81. Debt advice is hugely effective when creditors agree to help. But at the moment seeking advice cannot guarantee protection from creditors. Without this protection, people are not seeking help with their debts as quickly as they might, delaying financial recovery. 82. A breathing space scheme that guarantees quick protection from creditors, would in itself encourage more families to seek advice. However, more can also be done alongside to ensure families who might benefit from breathing space are aware of the scheme and its protections in the first place. This is explored further in the next section. childrenssociety.org.uk Policy, Research and Public Affairs Team 11

Guidance and referral mechanisms for professionals working with children 83. A breathing space scheme has the potential to turn around the lives of significant numbers of families trapped in debt. However, it will not be able to help families if they are not aware of the scheme or find it difficult to access. 84. Therefore, alongside the scheme itself, appropriate mechanisms, processes and guidance should be introduced to maximise awareness and access for families with children. 85. This should include guidance and referral routes for professionals who regularly deal with children, allowing them to refer families to a debt adviser for consideration of a breathing space where they believe the family may be struggling with problem debt. Examples might include schools, health practitioners and local authority children's and housing services. 86. If the proposed breathing space scheme is effective it should increase the number of people seeking debt advice, which would be a good outcome. Our recommendations place more onus on a debtor to take advice, and some recommendations would also place more requirements on the debt advice sector. 87. Therefore, to ensure the scheme works well, achieving its full benefits whilst being accessible to all, we believe that the Government also needs to ensure there is adequate financial and strategic support for the free-to-client debt advice sector at the same time. To do this the Government should, upon introducing the scheme regulations, initiate a review of the adequacy of support for the free-to-client debt advice sector in light of the expected additional demand likely to arise from an effectively implemented breathing space scheme. Guidance and referral mechanisms for debt advisers 88. Families with children in problem debt may need further support to deal with their underlying circumstances. Our evidence 37 highlights the range of situations that can lead to families ending up in problem debt. Help with dealing with these issues, in parallel with debt advice, could result in better outcomes for many more families. 89. More should therefore be done to empower debt advisers to signpost families with children to other support services where they need broader support to help deal with the underlying circumstances. This would help ensure that families with children in problem debt have the full support they need. 90. Options could include making guidance and referral routes available to help debt advisers point families with children to relevant additional support services. This might include family, relationships, health, children's or housing services. childrenssociety.org.uk Policy, Research and Public Affairs Team 12

Question-by-question responses Question 1: In your opinion, how should the government decide who is eligible for a breathing space? In particular: a) How should the government define serious problem debt in the context of a breathing space? b) Should eligibility be determined by a set of defined characteristics, or should there be some discretion to determine eligibility? c) If there is some discretion, who should be tasked with exercising it a regulated debt adviser, or some other person? d) Are there any other entry criteria and / or exemptions the government should consider? e) Who should be responsible for regulating and enforcing access to a breathing space and how can disputes be resolved? The key eligibility test should be whether it is the most appropriate solution for each applicant, so there should be no general exclusions. An affordability assessment by an independent regulated debt adviser, following wellestablished industry approaches, should determine whether a statutory repayment plan is the right option. Regulations should ensure that the affordability assessment properly factors in the additional financial vulnerability of families with children. Further careful consideration should be given to the access rules specifically for the initial six-week breathing space period. In particular, because the time period is short, there is a good case for a 'lighter touch' approach for this initial period. We suggest a model whereby an individual's statutory repayment plan is deemed approved on the basis of recommendation by a regulated debt adviser, subject to any objections from creditors received within a fixed time period. Debt advisers are already regulated by the FCA and this regulatory framework could be reviewed to make any necessary adjustments to incorporate the new scheme. The FCA could also act as the appeal body for creditors who wish to object to a proposed repayment plan. If creditors appeal, the protections provided by the breathing space should be applied throughout the appeal period and extended until the appeal decision has been made. A full explanation of these points is given in paragraphs 53 to 74 above. Question 2: What should be the trigger point for a breathing space? In particular: a) Should a breathing space only be available for a person who seeks regulated debt advice? b) Should individuals have demonstrated they have already taken steps to try to manage their debt? childrenssociety.org.uk Policy, Research and Public Affairs Team 13

c) If so, at what point should the six weeks start for instance: once a breathing space has been requested, when the first advice session has occurred, or once adviser has confirmed a breathing space would be appropriate? Due to the importance of getting early debt advice (described further in paragraphs 75 to 82 above), we believe that access arrangements for the initial six-week breathing space that encourage take-up of debt advice are to be preferred. This would be compatible with a 'lighter touch' approach (than for the statutory repayment plan phase) described in paragraphs 71 to 74 above, with protections given on the condition that specialised debt advice is subsequently obtained. Options could include initial access via a more generalist advice provider, or direct and simple application from the debtor to some central body. The latter could trigger referral to a debt adviser if not sought already. The point at which the initial breathing space would start somewhat depends on the details of the particular access process chosen. If access were given on the basis of a recommendation to proceed to the next stage by a generalist advice provider (on the condition that further specialised debt advice is sought) then the breathing space protections should begin at the point the initial adviser makes that assessment. A full explanation of these points is given in paragraphs 53 to 74 above. Question 3: Should all debts be eligible for a breathing space? a) How should multiple debts be treated; is there a priority order of debts which should be included as part of a breathing space arrangement? b) Should some types of debt be exempt? In particular, where the debt is the late payment of a fine or penalty? c) In particular, should debt owed by self-employed / micro-businesses be included? The general principle should be that all debts existing at the date the debtor seeks advice should be covered by the scheme. It is vital that this includes debts to national government, local government and other public bodies. Some types of debt - where the creditor has an ability to take actions that the scheme cannot protect against and that have a significant negative impact on the debtor - should be included within a scheme with the highest priority payment status. Arrears of rent to a private landlord is a clear example of a debt that should be included in schemes with this highest priority status. This would help protect tenants from section 21 eviction proceedings. Other particular debt types should also be prioritised over general unsecured debts, although not to as high a degree of prioritisation as the first category above. This second category would include those debts that are generally prioritised in a voluntary debt management plan under current best practice guidance for regulated debt advisers. These childrenssociety.org.uk Policy, Research and Public Affairs Team 14

are usually debt types where the creditor is allowed to use some form of enhanced recovery or enforcement mechanism, such is the case for council tax. The scheme would apply to debt arrears that had built up to the point that the scheme protections start, but people would still have to make payments towards 'continuing liabilities' such as ongoing rent, utility and insurance payments. A full explanation of these points is given in paragraphs 32 to 45 above. Question 4: Should all interest, fees and charges be frozen throughout the breathing space period? It is vital that all interest, fees, charges and enforcement action are frozen throughout both the initial breathing space period and the statutory repayment plan for the scheme to be effective at achieving its aims. To be clear, this includes freezing enforcement action (not specified in the question). The reasons are set out further in paragraphs 46 to 52 above. Question 5: What activities must the breathing space participant continue with to remain eligible? For instance: a) Should they be required to attend advice sessions? b) Should they be required to make any repayments during a six-week breathing space, if their financial situation allows it? Due to the importance of getting early debt advice (described further in paragraphs 75 to 82 above), we believe that the breathing space scheme should be structured so as to encourage take-up of debt advice in the initial stages, and then to require ongoing engagement with a debt adviser at appropriate points as a condition of the scheme. For instance, if a 'lighter touch' approach (than for the statutory repayment plan phase) described in paragraphs 71 to 74 above were taken to give initial immediate access to breathing space protections, then those protections should be given on the condition that further specialised debt advice is taken. Furthermore, if the options described in paragraphs 8 to 15 above are used to allow the initial six-week breathing space to be extended in appropriate cases, then this would be on the basis of a debt adviser making an assessment that this is the correct course of action. As explained in paragraphs 53 to 70 above, we believe that an independent debt advice professional is best placed to assess the suitability of a scheme and help design a repayment plan that is appropriate for each individual's circumstances. Paragraphs 18 to 31 above describes how debt advisers should be able to use this principle to apply flexibility during a statutory repayment plan. This extends to being able to ask a debtor to make one-off payments if they come into an unexpected surplus, or to childrenssociety.org.uk Policy, Research and Public Affairs Team 15

increase regular payments if they experience a sustained rise in income above the expected level. However, these kinds of payments should not be considered until a debtor has been able to undergo a comprehensive assessment and advice session with a regulated debt adviser. We think it is unlikely that the right conditions would occur within the relatively short sixweek initial breathing space period for these sorts of payments to be made. If income increases within the initial six-week breathing space period, the six-week period of breathing space should stay in place. Finally, in paragraphs 25 to 30 above we discuss potential periods of 'token payments' in the context of the statutory repayment plan. Although some might argue that requiring 'token payments' from debtors during the initial six-week breathing space period might help safeguard against disengagement, we believe that this would make the initial breathing space period overly complex (as time is needed to work out who the creditors are) and would blunt its intended positive effects (as there would still be immediate needs to deal with payment administration and associated stress). Question 6: Are there circumstances in which a breathing space period could end before six weeks, such as if an appropriate solution is found? Who could be responsible for enforcing this? The options for extending the six-week breathing space described in paragraphs 8 to 15 above draw on the principle that breathing space protections should be applied for as long as is necessary to reach the point where a long-term debt solution is in place. For some, this may need to be longer than six weeks. However, for others, a solution might be reached earlier than six weeks and in this case it might be reasonable to end the initial breathing space period early, at the point the longerterm solution begins (whether that is a statutory repayment plan or some other solution). As set out in our response to Question 5, if income were to increase within the initial sixweek breathing space period, this six-week period of breathing space should stay in place. Question 7: Should breathing space protections only cover debts existing at the outset, or also include new debts arising during the six-week period? Mirroring our response to Question 3, the general principle should be that all debts existing at the date the debtor seeks advice should be covered by the scheme. The scheme would apply to debt arrears that had built up to the point that the scheme protections start, but people would still have to make payments towards 'continuing liabilities' such as ongoing rent, utility and insurance payments. A full explanation of these points is given in paragraphs 32 to 39 above. Question 8: Should a breathing space be noted on a person s credit file? childrenssociety.org.uk Policy, Research and Public Affairs Team 16

N/A. Question 9: How frequently should a debtor be able to access a breathing space, and what criteria should control the frequency of access? Ideally, access to breathing space should be based primarily on an independent professional assessment of individual circumstances at any given time (as explained fully in paragraphs 53 to 74 above). It follows that there should be no arbitrary limits on the number of times that a particular debtor can use the breathing space scheme. This would mirror the approach in other debt or insolvency solutions, including bankruptcy or Individual Voluntary Arrangements. If restrictions on frequency of access are desired, the rules should at least treat each phase of the scheme (initial breathing space and statutory repayment plan) as distinct from each other. This means two important things in particular: i) Different rules should apply to each phase of the scheme because they each have different purposes and risks attached to them. We believe there should be no frequency of access restrictions on the statutory repayment plan under our suggested proposals because access to this will be robustly controlled by regulated debt advisers. However, if our suggested 'lighter touch' access rules (as described in paragraphs 71 to 74 above) for the initial breathing space period were to be used, then a valid case could possibly exist for applying some form of control over frequency of access to this phase. This could help limit the risk of abuse of the initial six-week period by debtors repeatedly using it over a short period to avoid debt repayments without pursuing a proper long-term debt solution. The DAS, for example, has minimal access rules for its initial six-week debt moratorium but restricts its use to once in any 12 month period. We suggest that an analysis of repeat use of the scheme should form part of our recommended Government review of the first 12 months of operation of the scheme (as per paragraphs 16 to 17 above). ii) Using just one phase of the scheme should not disbar a debtor from using the other phase at a later date. For instance, a debtor might use the initial breathing space to stabilise their circumstances but then exit without needing the statutory repayment plan. This debtor should still be able to access the statutory repayment plan later on if circumstances change. On the other hand, a statutory repayment plan might be put in place quickly without the need to use any or all of the initial breathing space period. In this case, the debtor should still be able to access the remaining breathing space period if they need to later on. It should be noted that the need for repeated access to a breathing space scheme depends to some extent on the length of the initial breathing space period. An insufficient breathing space period increases the risk that the underlying problem remains unresolved, meaning debtors find themselves needing another breathing space further down the line. A longer initial breathing space period (discussed further in paragraphs 5 to 15 above) would therefore also help address the need for repeat access to the scheme. Question 10: What challenges would creditors face in implementing the scheme? childrenssociety.org.uk Policy, Research and Public Affairs Team 17