The charity warns 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.

As debt charities gear up for a doubling in demand for debt advice by the end of the year, StepChange has set out three key recommendations which it said will enable a less painful exit strategy from the debt backlash.

On the basis of research by YouGov, StepChange 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, StepChange estimates 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 (1.7 million), an overdraft (1.6 million) or a high cost credit product (980,000). Other common financial coping strategies include using savings, asking family and friends for help, applying for Universal Credit, and selling possessions.

While 70% 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% have been negatively affected financially by coronavirus. This compares to 25% of those not in financial difficulty.

Without mitigation, the situation for both groups will get even worse once job support and temporary forbearance measures are withdrawn. 

However, it is within the Government’s gift to mitigate some of the worst effects, and to smooth the bumpy road that lies ahead for many households’ finances.

To inform its recommendations, StepChange commissioned new research to get a better sense of the scale of the problems likely to be felt by different groups. The charity has identified three realistic main focus areas that would help the maximum number of households transition back to a sustainable financial position, and in turn reduce prolonged, long term pain to the wider economy.

1. Embed tapered ongoing protections and forbearance on housing/rent, credit repayments, and Council Tax. This would provide a sustainable route back to normality over a manageable period for households whose incomes recover but who are left with a debt backlog. While the nature of tapered support across different types of debt may vary, there should be a central principle of a gradual exit, rather than a sudden cliff-edge at which full repayment is required. While the recently announced extended suspension of rent evictions is welcome, it simply pushes out the date of cliff edge but does not change the pressing need for effective protection and forbearance on rent arrears, council tax and credit that gives people a safe route to recover rather than sudden and harmful debt enforcement.
2. Implement a central fund of at least £5bn to enable grants for those who fell behind or were forced to borrow during the pandemic and whose incomes do not recover, enabling partial or full debt relief for the worst affected where realistic chances of repayment may simply not exist. This is equivalent to around a tenth of the cost of the employment support schemes.
3. Reform Universal Credit – preferably permanently, but at least for a temporary period – to address the shortfall between the support available and households’ realistic essential costs incurred during the pandemic, that will otherwise leave households permanently facing hardship and unaffordable deductions. Specifically, dropping the five-week wait and not seeking repayment of advances would make the biggest difference.

There are numerous other useful steps that also need to be taken. These include making sure that bailiff visits do not restart prematurely and inappropriately, that IVA lead generator debt charity imposters are prevented from scamming vulnerable consumers at a time when more people than usual may be searching online for help with their financial situation, and that the opportunity for wider long-term reform is grasped. In the short term, however, the three steps outlined above are those that StepChange believes would make the largest positive difference and mitigate the worst outcomes for affected households.

Commenting on the recommendations, StepChange CEO 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 £6bn 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.

“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.”

Responding to the briefing, Citizens Advice Scotland spokesperson, 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.”

• Read all of our articles relating to COVID-19 here.