'Open door' to benefits debt misery

PLANS by the Treasury to allow lenders to collect debt arrears direct from welfare benefits have triggered a storm of protest.

The proposal, buried in the small print of Gordon Brown's Pre-Budget Report on December 2, would allow banks and other lenders to 'apply for repayment to be made by deduction from benefit where normal repayment arrangements have broken down'.

It is described as a 'creative solution' to the reluctance of mainstream lenders to offer credit to the poorest members of society.

But there are fears it could hit the living standards of the poor, driving them to borrow from loan sharks.

Kate Green, chief executive of the Child Poverty Action Group, said: 'Simply taking money straight from benefits should not be an accepted way of recovering loans - how would people react if the Government said it was OK to do it from individuals' salaries?'

The Consumer Credit Counselling Service, the largest debt charity, was equally unenthusiastic. Chairman Malcolm Hurlston said: 'It doesn't look right and I don't think it is productive.'

David Willetts MP, Conservative-Work & Pensions spokesman, accused the Government of 'using the benefits system as a loan guarantee for commercial lenders'.

He said: 'This is one reason poorer people are wary of having their benefits paid into a bank account, rather than in cash. They fear having some of their money stopped.'

One community worker who promotes financial services in poorer urban areas told Financial Mail: 'I understand the lenders want their money back, but this could leave people worse off than before and even drive them to borrow from loan sharks.'

Citizens Advice was cautious about the proposal. Policy director Teresa Perchard said such a scheme could be helpful to people without bank accounts.

But she added: 'The amounts to be paid must be affordable and ensure the benefit recipient has enough money to live on - benefits are not generous and are intended to be for subsistencelevel existence.

'In many cases where people have multiple debts and are on benefits they may only be able to afford to make very small, almost token, payments to creditors.'

The Pre-Budget Report stated that the Government aimed to 'reduce some of the increased costs and risks of lending to vulnerable groups' by both commercial lenders and those in the so-called 'third sector', such as credit unions.

It said the facility for deducting repayments direct from benefits would 'only be available where loan products are appropriate and provided in a responsible manner'.

Consultations are under way with lenders and will close at the end of January.