The CAB service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. The service aims both to provide the advice people need for the problems they face, and to improve the policies and practices that affect people’s lives.
The CAB network is the largest independent network of free advice centres in Europe, providing advice from over 3,200 outlets throughout Wales, England and Northern Ireland. We provide advice from a range of outlets, including GPs’ surgeries, hospitals, community centres, county courts and magistrates’ courts, and mobile services both in rural areas and to serve particular dispersed groups.
In 2006/7, the CAB service dealt with 5.7 million problems. This included 1.7 million enquiries on debt.
Introduction
This briefing covers:
* The services bureaux provide to people in debt.
* How people get into debt.
* The problems they experience when in debt.
* What needs to be done to tackle these problems.
What help is provided by bureaux to people in debt?
All Citizens Advice Bureaux help people with their debt problems. Advisers help people using a structured process which aims to:
* preserve the client’s home, fuel supplies and liberty and deal with emergencies;
* advise clients about their rights and their responsibilities;
* advise clients on increasing their income and decreasing their expenditure
* allow the client to make an informed choice about how they can best deal with their debt problem;
* treat creditors fairly, and
* where possible, empower the client to deal with the problem her/himself.
Bureaux are also increasingly providing financial capability training to both adults and young people to help people understand the financial products they are using and to avoid getting into unmanageable debt.
A study on the impact of debt advice conducted by the Legal Services Research Centre in 2007 found that debt problems were often linked to a variety of other problems, and that advice should therefore by available on a multi-issue basis (A Helping Hand: the Impact of Debt Advice on People’s Lives, LSRC, p.21):
‘More generally, the findings on the impact of debt problems provide further support for the development of co-ordinated advice and support services and networks. People facing debt problems may, for example, benefit from support in maintaining relationships, parenting, finding employment and in relation to their psychological and physical well-being.’
Funding for these services comes from a number of sources, including local government and the Legal Services Commission. More recently, as a result of the Financial Inclusion Fund, Citizens Advice has received an investment of £33 million between 2006 and 2008, and will receive a further £49m over 2008/11. The initial injection of moneyenabled us to recruit and train 350new moneyadvisers to work in the most deprived communities across England and Wales.Over 2008/11 it is anticipated that the work of these new advisers will be developed further into a more holistic approach involving the introduction of a greater element of financial capability andfinancial inclusion work.
How people get into debt
In the last ten years the number of debt problems dealt with by Citizens Advice Bureaux has doubled. Most of the increase has been related to consumer debts, such as credit cards, unsecured personal loans, catalogues and hire purchase agreements. However in the past few months, bureaux have been reporting increases in mortgage arrears problems, fuel and council debt problems.
People get into debt for a variety of reasons, including:
* Poor money management and overcommitment.
* Living long term on a low income.
* A change of circumstances.
It is CAB experience that the actions of lenders and debt collectors can exacerbate debt problems, and even cause them. These practices include:
* Marketing for lending which encourages irresponsible borrowing behaviour.
* Lending decisions made without any apparent check on the borrower’s ability to repay the loan.
* Mis-selling of expensive payment protection insurance where the borrower could never benefit from it.
* Offering consolidation loans (both secured and unsecured) when borrowers tell them they are in financial difficulties.
* Heavy handed debt collection and enforcement practices, including taking possession action for mortgage arrears as a first rather than last resort.
Here are a few examples:
A CAB in Lincolnshire reported that a man whose outgoings were going to increase when he had to move house, sought advice from his bank about how he could reduce payments on the loans he had with them. These were his only debts and no payments had been missed. The bank said that they could not refinance the loans to reduce the payments, but suggested that he take out a credit card instead. They said that the more products he had from them the more likely they would be to help him if he got into trouble. The client took the credit card and was given a £4,000 limit. He then phoned the number he was given for the bank’s financial assistance dept. They advised him that they could not help because he was not in arrears. They could only suggest that he did not move house. As he had no choice in the matter this was no help at all. At the time of seeking advice, the client had a £1,200 overdraft because the bank would not stop taking the loans out of his bank account. He also has an additional £1,500 debt on the credit card, as he used this to finance his move. The client was now considering bankruptcy.
A CAB in Norfolk reported that a couple owing more than £62,000 approached a secured loan company for a consolidation loan. They had surplus income of £427 per month, but repayments to Picture were £702 per month - a shortfall of £279 per month. The loan also put the clients into negative equity as they were in a shared ownership scheme with only £10,000 equity after the first charge. The CAB was concerned about the content of this company’s website. Although it had a Budget Planner which asks for figures on income, expenditure and the amount you want to borrow, the company itself did not seem to use it when making lending decisions. The CAB felt that this amounts to encouraging irresponsible borrowing.
A client of a Kent CAB took out a secured loan for £85,000 including payment protection insurance (PPI), but was not told that the loan was variable and that the cost of the PPI was an additional £21,000, until they received the loan agreement. This loan has put the client in negative equity as they already have a mortgage with £95,000 outstanding. When the client’s partner became unwell, they tried to make a claim on the insurance, but were shocked to discover that it only covered the client. The couple now do not have enough money coming in to cover their expenditure and are at risk of losing their home.
A Surrey CAB reported that a 52 year old man with severe mental health problems sought advice about multiple debts. Until he came to the CAB he had been paying them off using the proceeds of the sale of his caravan. As the client was on state benefits, the CAB wrote to all his creditors making small offers, and asking them to freeze interest charges. However he continued to receive demands for more than agreed payments from some creditors who seem unable to understand that customers on benefits cannot afford large payments. A major credit card company refused the offers made by the CAB and asked for more money, threatening court action, even though this would just increase the debt. This company continued to harass client (by 'phone and letter) demanding £40 per month, which he could not afford to repay. Another bank accepted the offer, but refused to suspend interest charges. The CAB was concerned that the attitude of these companies did not allow the client to gain control over his finances, and was causing him additional stress.
A lone parent sought advice from a CAB in Lincolnshire about a loan secured on her car at an extortionate rate of interest (at least 200% APR). The week before she came to the bureau she hadmissed one payment on the loan, and the company clamped her car without notice. Her mother had to pay £700 to the loan company to have the clamp released. The client told the CAB that as she lived in a rural area, it would be difficult to get around without her car.
A CAB in London reported that a man could not pay his mortgage for three months after he lost his job. He had found a new one and was trying to sort out his debts. Although his mortgage lender was initially sympathetic and agreed to a payment break, and then subsequently allowed him to pay off his arrears by instalments of £50 per month, they have now taken possession proceedings. The client was very worried that he was going to lose his home and does not understand why the lender was going to court after making an arrangement with him.
Conclusion
Our conclusions on protecting people with impaired credit records are that:
* Lenders should ensure that loans are affordable and suitable for the needs of borrowers when they take them out.
* Lenders should encourage lenders to borrow responsibly in any marketing literature.
* There must be action to safeguard access to advice services, which are currently in great demand. Access to advice is vital given the commitment in the new Banking Code to identify people in financial difficulties at an early stage and refer them for advice. The money promised by the government to increase the number of county court advice desks on mortgage possession days is very welcome. The credit industry could help by continuing to fund access to free money advice.
* Creditors must accept that if they do not agree to reasonable offers to repay debts, and take draconian enforcement action instead, they are piling on the pressure for consumers who can and want to pay. People in financial difficulties need support and understanding if they are to deal effectively with their debts.
* Regulators must stand ready to take firm action against firms who lend irresponsibly and use heavy-handed debt collection practices.
