As the public health crisis of Covid 19 unfolds, it is still too early to know the extent the financial crisis will impact on the personal finances of millions of Scots; but with over one million new claimants already claiming social security benefits across the UK; and predictions growth in the economy could fall by 25-40% this quarter, it’s not unreasonable to anticipate the effects will be severe.
Particularly, as almost 700,000 Scots were already struggling with problem debt before this began.The problem is unlike in the aftermath of the Credit Crunch, the free Money Advice Sector in Scotland is not in any state to respond. After 10 years of austerity and cuts of 45% to free money advice by local authorities between 2014-17, the Sector was already 50% under capacity according to the Money Advice Service. What that number will be after this crisis is anyone’s guess.
After the last Credit Crunch, we were in a much stronger position.
Between 2003-2005 there had been an additional £3 million invested each year; and from 2005-2007 an additional £5 million per year. In addition to that we still had a relative progressive system of laws that could help people.
Between 2009-15, there were over 140,699 personal insolvencies and 21,364 Programmes under the Debt Arrangement Scheme. This allowed Scotland to effectively respond to that crisis in a way that other countries couldn’t.
Take Ireland, for example. In the first quarter of 2015, they still had over 104,000 mortgages in arrears, and of those, 37,933 had arrears of more than 2 years. Limited in the immediate aftermath of the credit crunch by what was a Victorian era insolvency system, between 2009 and 2015, there were only 1,163 personal insolvencies.
The lesson is clear, if you want to recover from a financial crisis, you must have the resources and laws in place to address the issue of problem debt.
In addition to funding free Money Advice services properly, you need to think radically.
To begin with, Scotland could waive bankruptcy fees for everyone who is in receipt of income-based benefits, whilst increasing the maximum level of debt that can be included in fast track Bankruptcies from £17,000 to £25,000. We could also discount the first £50 of disposable income, so those on low incomes don’t need to unnecessarily contribute to their bankruptcy.
This could see 1,000’s debt free within 6 months.
We could also disregard the first £30,000 of equity in homes in all bankruptcies and avoid their unnecessary sale.
In addition to that, the new Debt Arrangement Scheme Regulations, passed only in November 2019 that banned all private sector fees, could be applied to cases entered prior to them commencing. That would assist thousands struggling to repay their debts and raise an additional £2-3 million for the free money advice sector.
We could also increase protections in bank account arrestments (last year there were over 170,000), so only a percentage of funds held in accounts over £529.90 is frozen, instead of the full amount, like with wage arrestments.
Such radical thinking is necessary, if we want to ensure Scotland responds effectively to this crisis, like we did the last one.