'Tsunami' of personal debt expected, charity warns

A post-Covid personal debt tsunami is “inevitable” unless radical relief is given, a major debt charity has warned.

Large numbers of people are experiencing financial hardship as a result of the pandemic.
Large numbers of people are experiencing financial hardship as a result of the pandemic.

StepChange said that coronavirus-related debt will act as a drag on economic recovery and will deluge advice services once the reality of people’s situations begins to hit home in the coming months.

Debt charities say they are gearing up for a doubling in demand for debt advice by the end of the year.

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StepChange has called for the UK Government to consider three key recommendations to enable a “less painful” exit strategy from the debt backlash, including a reform of Universal Credit, the implementation of a central fund of at least £5 billion to enable grants for those who fell behind or were forced to borrow during the pandemic and embedding tapered ongoing protections and forbearance on housing and rent, credit repayments, and Council Tax.

StepChange chief executive Phil Andrew said: “We were already dealing with a debt crisis, but Covid has so far added another four million people and counting to the number who are going to need help finding their way back to financial health. With £6 billion of additional household debt directly attributable to the effects of the pandemic, this is a problem that isn’t going to solve itself.

“Cost might be seen as a barrier to the recommendations we outline. However, the costs of not intervening would ultimately be higher. The misery, damage and economic drag that will inevitably follow the pandemic can and should be mitigated through public policy, and the approaches we suggest are the biggest game-changers.”

He added: “As a charity, we have our own part to play. Like other debt charities, we are gearing up for a significant increase in demand for our usual services. We are also working on a specific solution to help people whose finances have been hit by the pandemic and who need a short term helping hand to get back on track without jeopardising their credit status. The false calm in which we find ourselves while furlough and forbearance take the strain will not last indefinitely. We will be ready to help as more people find their debt problems crystallising over the coming months.”

The charity estimates that each affected adult has accumulated an additional £1,076 of arrears and £997 of debt. These figures reflect the situation as of late May and are likely to increase substantially before the lockdown is fully phased out.

Since the beginning of the coronavirus lockdown period, the report found that an estimated 1.2 million people have fallen behind on their utility bills, 820,000 people on their council tax, and 590,000 on their rent. Meanwhile, 4.2 million people have borrowed to make ends meet, most often using a credit card, an overdraft or a high cost credit product. Other common financial coping strategies include using savings, asking family and friends for help, applying for Universal Credit, and selling possessions.

While 70 per cent of those affected were not in financial difficulty before lockdown, the minority of households who were already struggling before the pandemic have seen their finances hit disproportionately hard. Of those in severe problem debt before the outbreak, 45 per cent have been negatively affected financially by coronavirus. This compares to 25 per cent of those not in financial difficulty.

Citizens Advice Scotland spokesman Myles Fitt said: “Even before Covid-19, personal debt was one of the most significant issues we were seeing in the Citizens Advice network across Scotland, and the economic fallout from the pandemic risks pushing more people into debt or deeper into debt.

“What we need to see as part of the economic recovery is creditors freezing interest on debt during payment holidays, creditors supporting people to make affordable repayments to their debts, accessible benefits and grants that help increase incomes, and debt write-off where people are very unlikely to financially recover.”

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