The 2017 manifesto committed to introduce a statutory debt repayment plan (the plan) as well as a period of breathing space. The plan would enable an individual in problem debt to enter into a formal agreement with their creditors to repay all of their debts over a manageable time period. The plan would be a significant intervention, changing the profile of a debtor’s repayments over time, ceasing all enforcement action by creditors against a debtor during that period, and preventing the charging of interest, and default fees and charges on all debts included in in the plan. The government proposes that the plan would be added to the existing suite of debt solutions available to those in problem debt.
5.1 Existing debt solutions There are already statutory and non-statutory solutions available to people who have fallen into problem debt. Existing statutory debt solutions include bankruptcy, individual voluntary arrangements (IVAs) and debt relief orders. These solutions all offer varying degrees of debt relief to individuals who enter them. They are effective for people who are substantially over-indebted, and are unable to repay all of their debts in the foreseeable future. Crucially, they include almost all of a person’s debt, provide total protection from creditor action, and stop the escalation of interest, fees and charges. However, many people may be unable to meet repayments on their debts in the short term, but will be able to repay them in full over the long-term. These people may have had a short-term income shock, from which they will recover. For these people, debt relief through existing statutory solutions may not be appropriate. Many therefore seek out non-statutory solutions, such as Debt Management Plans (DMPs). DMPs are voluntary agreements between a debtor and some or all of their creditors to repay their debts in an extended time period. DMPs are generally administered by debt advice agencies. Debtors make a single monthly payment to the debt advice agency, which then distributes funds to the individual’s creditors in an agreed proportion. Creditors do not have to agree to the proposed repayments, can continue to charge interest, fees and charges, and can continue to take action to recover their money. Although DMPs are effective in alleviating some individuals’ debt problems, the voluntary nature of the plans can make them less effective for others. Many creditors, including priority creditors who may take stronger enforcement action, do not sign up to the new proposed repayment period. Given that an increasing number of individuals in problem debt experience issues with both priority debts (debts that often have stronger enforcement action taken on them, such as the instruction of enforcement agents) and non-priority debts, the protections of a DMP can be narrow. Informal debt solutions also do not protect individuals’ assets, including the family home. Even if an individual’s creditors have agreed to the terms of a DMP, the non-statutory nature of a DMP means they are able to take further recovery and collections action, and charge interest, fees and charges on individuals’ debts, even if the debtor keeps up with their payments. This means that an individual’s debts can take a longer time to pay off, and debtors can continue to experience detriment from enforcement action.
5.2 A better solution for some debtors Given the limitations of non-statutory debt solutions, the government recognises that the implementation of an effective, well-designed plan would serve a number of debtors not currently suited to existing statutory debt solutions. The introduction of the plan is a significant undertaking. In order to be effective, it should:
provide wide-ranging protections for debtors. This includes ensuring that a wide range of creditors – including those that do not currently choose to enter informal DMPs – are bound by the plan. It also includes ensuring that creditors are prevented from taking enforcement action, and that debtors benefit from a freeze on interest, and on default fees and charges during their plan
be easy to offer and administer for debt advisers. The government recognises that the debt advice sector is currently undergoing significant change, and is keen to ensure that the plan is simple to administer, alongside providing a predictable funding stream
improve returns for creditors, whilst minimising administrative burden. The introduction of the plan could substantially change the repayment profile of debts, prevent creditors charging interest, fees and charges on debts, and therefore change the way that some creditors take recovery action. The government recognises the importance of designing a solution that maximises returns for creditors, while reducing the sometimes significant administrative burden of equivalent debt solutions
The government is therefore proposing that the plan includes very substantial protections, and is providing detailed proposals for debt advisers and creditors about how the scheme should be administered. However, given the substantial challenges involved in designing and introducing the plan, and the government’s determination to ensure the plan is fully effective for the people who could benefit from its protections, the government intends that the plan will be developed over a longer time period than the introduction of breathing space. The responses to the detailed policy proposal set out in this consultation, and ongoing work with both the debt advice sector, creditors, regulators and other government departments, will inform further policy development and consideration of the appropriate statutory framework for the plan. The government will set out its next steps for implementation of the plan in the response to this consultation, in early 2019. The next two chapters of this consultation set out the proposed eligibility criteria for the plan (chapter 6), and the protections that would be offered to individuals in the plan (chapter 7).