How we lie to ourselves about debt

When I started my first job, I met with our finance officer. She was looking quite stressed, so I asked what was going on. She explained she was working out how much of our ‘bad debt’ to write off as an organisation. I was confused, naively.

Turns out, this is probably what most people know, but every year companies and organisations write off debt. They decide that even if someone owes them £50, they are likely never to get that money back –  in short, it costs them more to chase the debt, than they’d ever make getting it back.

But then, some enterprising people worked out that there was a market there. Now, companies can get some of that back. So rather than writing it off completely, and getting nothing back, they can sell that debt to a debt market, for around £5 (on average, 10% of the debt value).

They get something, and a debt collection agency now gets the £50 debt. They now own the debt, and they specialise in getting that money back at all costs. Bring on threatening letters, bailiffs, property confiscation, and interest payments. Sometimes that initial £50 debt starts to climb with the interest every year, trapping people into regular repayments that they can’t ever meet, or pay off.

All for a debt that the original company has already forgotten about.

Debt impacts all of us, but it impacts people in poverty more. People who are struggling to make ends meet, who are in vulnerable jobs, or who have been laid off, are more likely to be in debt. Just think about the impact of Covid-19. Perhaps someone was in a secure job, and took out a mobile phone debt, knowing they would pay it back in monthly instalments? But now they’ve lost their job.

There’s help for them, sure, but there’s also a shady, heartless debt market that is waiting to swoop in and make a massive profit on suffering and vulnerability.

So, we live with this big lie. We pretend to ourselves as a country that debt is a fixed thing, that the only people who wrestle with debt are lazy, or irresponsible, when both are absolutely not true. Debt is flexible, and is definitely not fixed. And people who wrestle with debt are working families, young people in the service industry, and those who fall into difficult times. The links between mental health, homelessness and debt, for example, are so apparent.

The solution?

This is why I am so passionate about the policy I pushed for within the Welsh Liberal Democrats. Inspired by Occupy Wall Street, I am suggesting that we create a limited fund for the period of the next Senedd, to step in and buy bad debt when it comes onto the market.

People have put on debt during Covid-19, through no fault of our own, and for a fraction of the cost, we could give people the space to breathe and start over.

If we win the Senedd elections, we will create a £200,000 pot for use over five years. That is debt purchasing power of around £2m! We will buy debt that companies are no longer pursuing.

And we will write it off. Gone. No more. Never again.

Imagine the difference that will make to struggling families.

On #DebtAwarenessWeek, that should be an idea we all hold onto firmly when we are campaigning.

It’s time we had a Government that was aware of market forces – but rather than letting them take over, guiding them and using them to make a huge difference to our communities and families.

* Oliver Townsend is Oliver Townsend is Prospective Senedd candidate for Islwyn and Chair of Newport and Severnside Liberal Democrats

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7 Comments

  • Brad Barrows 26th Mar '21 - 3:37pm

    Unfortunately, I don’t believe such a policy will have the outcome you anticipate. The reason why debt only sells for around 10% of face value is partly market forces and partly the impossibility of getting some of the debt paid. If the government were to enter the market to buy up debt, the price would likely be completed up say to more like 15% or 20% of face value. That would mean less debt could be cancelled for the same fund and also that the companies buying debt would have to push even harder to recover money spent buying the debt.

    My view is that it would be much better to give the £200,000 to a debt advisory service to help negotiate debt write-offs directly rather than seeking to purchase debt.

  • Totally agree with Brad. It’s a well meaning policy that looks like it’s been written without any thought for its consequences.

    The other issue is that this sends a message that if you get into debt, the Government will just write the debt off for you. There will certainly be people who have got into difficulties not of their own fault who need help – just like the example in the article – but there are going to be others who could pay their debt and are just choosing not to in the hope that they’ll get away with it, or even who bought stuff fraudulently. A blanket write-off of all debts that ignores individual circumstances will waste money helping at least some people whose debts actually should be pursued. Worse – if it encourages more people to try their luck at not paying debts, it’ll hurt many businesses – including many small family businesses who rely on customers paying their bills.

    I agree with the need to help people who are struggling due to – for example – changes in circumstances – but any help needs to be much better targeted than this policy would do.

  • Tony Harris 27th Mar '21 - 7:57am

    The side effects of such a policy can only be imagined. It would need far more thought as the complexities are significant. Although the sentiment is good there appear to be various flaws. Has Citizen’s Advice been consulted on this?

  • Peter Watson 27th Mar '21 - 8:17am

    “If we win the Senedd elections, we will create a £200,000 pot for use over five years. That is debt purchasing power of around £2m!”

    Googling “bad debt in the UK” I found this: “in 2015, UK banks and building societies wrote off £3.175 billion of loans to individuals” (https://www.graydon.co.uk/resources/blog/financing/what-bad-debt-and-why-it-so-bad), so Wales’ share of that could be well over £100 million per year.
    £2 million of debt spread out over 5 years looks like a drop in Cardigan Bay (would it even cover unpaid debts to national and local government in Wales?), and a fund worth £40000 per year could cost more than that to administer.
    And that’s before one even considers the points made by Simon and Brad about the principle and its consequences.

  • GWYN Williams 27th Mar '21 - 1:29pm

    @Peter Watson You make a fair point. Glas Cymru the holding company for Dwr Cymru, the only water company to operate entirely within but not serving the whole of Wales, claims that bad debts in 2019 alone were £19 million per year. With the pandemic it estimates that amount will more than double.

  • Nigel Jones 27th Mar '21 - 6:39pm

    This debt problem reminds me that when I was a councillor, I learned how so many people badly managed their money and once they got into difficulties completely lacked any skill or knowledge in dealing with it. This included self-employed and even many of those running small businesses in the town. We need much much more training, help and advice for people. As an extreme example a person working for a Credit Union told me of many people who thought that paying an interest rate of 400% on their borrowing was far better than 4% and had great difficulty being persuaded otherwise.

  • Peter Martin 29th Mar '21 - 10:22am

    The question of debt, and debt forgiveness, does need to be more discussed. Whether it is the small scale debts of poorer individuals who can’t pay or the larger scale debts of poorer countries like Greece and Italy.

    The concept of forgiveness is nothing new and is prominent in the traditional religions of Judeaism and Islam. It’s probably not something that is quite so prominent in the Protestant version of Christianty though.

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