This week, an amendment to the Financial Services Bill (2019-21) will be put to the House of Lords, aiming to ensure a ‘fair debt write-down’ of debts sold on the secondary debt market. This is a positive move towards a debt system which is more just and fair. But what does it actually mean? Let’s break it down.
If someone is in debt to a lender – for example a bank – the lender can sell that debt for a fraction of its actual cost. For example, if you owed £100, a bank could sell that debt on to another company for just £18. The debt is now owned by that second company. But despite the fact they bought it for just £18, they are legally entitled to collect for the full £100 from the original debtor.
Reputable companies will work out a long-term repayment plan with you – often freezing interest charges, perhaps writing off a portion of the debt in order to make the repayments affordable Others may take a more aggressive approach hoping to get repayments far in excess of what they originally paid perhaps even selling on any unrecovered debt to a third company.
From the perspective of the original debtor, when this buying and selling of debt occurs, you are no better off, and are still being chased for the full amount of debt. But now, your debt is in the hands of a company you did not choose, you may not know the name of and who are empowered to make decisions that have huge effects on your family’s life. Should they choose to exploit this power to aggressively seek full repayment there is little to prevent them.
The burden of debt is disproportionately felt by the poorest in our society. We know that debt traps families in poverty, and we need our financial system to offer people genuine options for escape and to ensure that those who seek to exploit families doing through troubled times are prevented from doing so by law and regulation.
Ensuring families get their fair share
The new amendment to the Financial Services Bill seeks to ensure families are treated fairly. The amendment, tabled in the Lords, aims to prevent profiteering by companies collecting the full face value of debt which was bought for a fraction of its original price.
The amendment proposes that should debts be sold on to secondary debt collectors for a fraction of their actual value, both the collector who has bought the debt and the debtor should benefit. The amendment refers to this as a ‘fair debt write-down’.
Practically speaking, this is achieved by placing a cap on the margin of profit the company purchasing the debt can make. It’s calculated in the amendment as the amount paid to buy up the debt plus no more than 20%.
For the person in debt, this means that if a secondary debt company purchases your debt for a fraction of its actual value, you’re not going to be chased for the original amount you owe – but rather a decreased amount.
It is simply not right that companies are able to make huge profits from others’ misery. This amendment seeks to ensure that the value of debt write-offs is shared between secondary debt buyers and those who need it most: the people who are experiencing indebtedness.
This amendment moves the conversation about household debt in the right direction. We need structural change to the way household debt is dealt with in order to build a more just and fair system. But the crisis of unrepayable debts incurred as a result of Covid-19 is still continuing to grow. That’s why we’re calling for a further rethink of the way we handle household debt in this country. It’s time to #ResetTheDebt.