Government debt payment plans will cause hardship, Citizens Advice warns

Press Releases > Government debt payment plans will cause hardship

16th March 2005

Plans to allow credit unions and commercial loan companies to siphon off debt repayments direct from welfare benefits could leave many vulnerable people without enough money to live on, according to a new report published today by national charity Citizens Advice.

The Department of Work and Pensions' third party deductions scheme already allows money to be docked from certain benefits to repay housing, council tax, child support, utility debts and court fines. A limit is set on how much can be deducted.

Evidence from Citizens Advice Bureaux across the country shows that for many people the scheme is an essential service that can prevent them from running into arrears with their rent, fuel and council tax charges by enabling them to pay off some of their debt to their creditors and avoid further debt recovery action being taken against them.

Under the new proposals, the third party deduction scheme would be extended to credit unions and commercial lenders to make it easier for people on low incomes to get credit, and prevent court action being taken if people cannot repay their debts.

In a report "Take it away" Citizens Advice warns that the new proposals could cause significant hardship, and argues that even if the existing scheme is not extended, it still needs a thorough overhaul and review.

Not all benefits are eligible for deductions under the current system and some problems are caused as a result. For example a CAB in Cambridgeshire reported that a lone parent lost her entitlement to income support when the benefit for her children started to be paid by child tax credit. This was due to the amount of maintenance she received. As a result she could no longer have deductions from her benefit for her water debt and current water consumption and was accumulating further arrears.

Citizens Advice wants to see all benefits brought into the current scheme, repayments of as little as £1 per week accepted for all debts, and people being given better information and more control over the deductions made.

Many CAB clients find it difficult to access cheap or even affordable credit. For example a bureau in Kent reported that a lone parent on income support had received an offer for a £200 loan and shopping vouchers with the invitation to ‘give your family the fun-packed Easter they deserve' and to 'shop 'till you drop'. She did not take in the fact the APR was 177 per cent. She was already repaying a home credit loan at £35 per week from her benefit income.

Citizens Advice says that reforming the Social Fund to increase the number of grants available and to extend loans to those in low-paid work or in receipt of other benefits could be a better way of widening access to affordable credit than allowing lenders access to the third party deduction scheme.

The charity says that lenders should only be allowed to get debt repayments deducted directly from benefits if:

Citizens Advice Senior Policy Officer Sue Edwards said:

"Evidence from the day-to-day advice work of Citizens Advice Bureaux indicates that the most vulnerable people continue to need access to the third party deductions scheme in order to manage their priority debts.

"We believe that the scheme should be made available to a wider range of benefit and tax credit recipients, to ensure that more people get the help they need to manage their finances.

"But we would urge the Government to be very cautious about extending the scheme to commercial loan companies and credit lenders. A better alternative would be to reform the social fund to widen access to affordable credit.

"We are very concerned that unless sufficient safeguards are put in place, deduction for credit loans from benefits could cause unnecessary and serious hardship. It is crucial that the government sets a reasonable limit on the type of debt and the amount of money that can be deducted from benefits so that people are left with a sufficient basic income to live on."

Last updated: February 23, 2007