Do we need to pay our debts?

Joe
People feel a sense of stigma or shame. People do not like the sense of finality and admission of financial failure. I've seen studies where people have gone without food purchases, they've let their health suffer, they've gone to extraordinary lengths to try to make sacrifices in order to keep paying the bills for as long as they could before they filed for bankruptcy.

Jess
That was Dr Joseph Spooner, an Associate Professor in the LSE Law School, highlighting the emotional toll debt can place on a person, and the lengths some will go to before having to concede they can’t pay what they owe.

Joe
Now, if we were all economically rational robots, nobody would do that, right? They would say, "There's a bankruptcy law that exists. The first sign of trouble, I'll just file for bankruptcy. Why should I make these sacrifices?" But that tends to be not the way that people actually act.

Jess
From individuals to governments, borrowing is a fundamental part of our world – but with a deepening cost-of-living crisis, and recession forecast to be the longest since records began, for many, the burden of debt looks only set to increase.

Welcome to LSE iQ, the podcast where we ask social scientists and other experts to answer one intelligent question. I’m Jess Winterstein from the iQ team where we work with academics to bring you their latest research and ideas.

In this episode I ask, ‘Do we always need to pay our debts?’

I’ll be asking Joe Spooner why so many of us are in debt and how government could better address the problem, and speaking to Sarah Williams, founder of advisory website Debt Camel, about how those concerned about their finances might be able to mitigate some of the most damaging aspects of being in debt.

“The cost of living in the UK is rising, and it’s changing people’s lives”

“If you’re worried about rising costs, you’re probably not alone”

“The nation is in the grip of a cost of living crisis.”

Jess

There’s no denying that times are hard in the UK. Before the pandemic, millions of people were considered over-indebted. In 2021, the number of households struggling with large debts increased by a third – a trend that’s only likely to have continued into 2022 and beyond. Why, in one of the richest countries in the world, are so many in such a vulnerable position?

Joe
We haven't seen an awful lot of wage growth over the past 10, 15 years. If you want to go back further, there's been a long time in which we've seen relatively low levels of wage growth. I mean, by some measures, wages are still below the amount that they were before the global financial crisis.

I’m speaking to Dr Joseph Spooner, author of Bankruptcy: the case for relief in an economy of debt He tells me about some of the factors driving ordinary people’s indebtedness.

Joe
One of the theories that's put forward is that we've seen a growth of a loans for wages phenomenon. This idea that while their wages have not been growing in line with the cost of living, sometimes debt has been filling that gap for a lot of people.

And that happens at two levels. That happens at the household level because people tend to borrow to make ends meet and to afford what we might think are necessary for having a reasonable standard of living. But also at the wider economic level. If people do not have a lot of extra money available to contribute to the economy to go out and spend money and to consume, well then the economy needs people to borrow money in order to keep things ticking over as well.

Jess
As Joe explains, debt is necessary to help people get by with their household finances, but it’s also essential for the health of the wider economy. If people can’t spend – or borrow to spend – then that’s a problem.

In addition the UK government’s austerity programme, which slashed public services – a hang-over from the last financial crisis - may also be playing a role in why families and individuals are going into debt.

Joe
We've also seen some other trends which maybe have been driving different types of debt problems. So one other explanation of rising debt levels is that there's a bit of a trade off between debt and welfare or the welfare state and the idea that austerity over the past decade and a half may have actually led to reduced incomes from any reduced public service provision for others and may have led to households having to take on additional debt in order to bear those costs.

Jess
Joe tells me how local authorities are increasingly taking a hardline approach to recovering council tax debt, often from some of the most deprived households in the country.

Joe
So some of my research, for example, looks at the big growth in council tax debt over the past decade where we've seen this scarcely believable position whereby local authorities send about a million bailiffs per year to houses around the country in order to collect council tax debt. Often as my research has shown in the parts of the country where we see the highest levels of deprivation and the lowest income. So we're seeing growth in these kind of problems where it's actually agents of government who are creating the debt problems through the withdrawal of local authority funding the increased liability of households for council tax debt.

So a lot of these dynamics have been taking place which have been contributing to this precarious situation for a lot of households, high levels of debt. And now this is all going to be exacerbated by current developments.

Jess
Are we at the moment just in the middle of a crisis?

Joe
We're talking a lot at the moment about rising interest rates and undoubtedly this is going to pose very significant challenges, particularly for anyone who has a mortgage. ]But things haven't exactly been wonderfully rosy over the past decade. We haven't exactly been living in a low interest paradise for most of the population over the past decade. So yes, mortgage interest rates have been kept lower than they historically would've been due to the low Bank of England base rates. But if you look at the actual rates of interest charge for personal loans, for credit card debts, for overdrafts, for the other kinds of financial products that a lot of households will be using, particularly low income households, the interest rates didn't fall along with the decline in the Bank of England base rate and they stayed consistently high even after the global financial crisis.

Jess
It may not always be possible to predict what storms are on the horizon, but one role of government is to plan for the future. I asked Joe if policymakers shouldn’t have foreseen and been better prepared for, if not these specific events, then at least some form of global turbulence?

Joe

Of course, we couldn’t have predicted what would’ve happened regarding the war in Ukraine or seen the pandemic coming, but what we could have been predicting were that crises happen. We can go back to the global financial crisis in the late 2000s and we might have thought at that point, well we've learned our lesson, right. We saw the harm that can be caused to the economy and to average households based on excessive household debt levels. Now the real tragedy I think, is that we haven't really changed the overall place of household debt in our economy since that time so many trends in our economy have continued to be dependent on households borrowing a lot of money.

So, for large portions of our economy, people have been getting by and just about getting by for too long, whereby there has been a reliance on this in order to make ends meet, for example, and to pay for essentials. That obviously leaves very little breathing space when things go wrong. And now of course the really serious situation is that we are adding the cost of living crisis and rising interest rates into that mix. So we're adding debt problems upon existing debt problems. And that's why I think things at the moment are looking particularly worrisome.

“Here’s one of my suggestions. A tip. Something that’s dirt cheap …if you put some of this behind radiators it really works, it makes the whole room nice and warm and it means you can turn down your thermostat without it causing you any discomfort. … just that kind of thing can make such a difference. Moving the sofa away from the radiator, you don’t want to be heating the sofa, you want to be heating the room.”

“People know that when their bills arrive they can either cut their consumption or they can get higher salary or higher wages - go out there and get that new job.”

“Come to Ashfield, look at our food bank and I think you’ll see first hand that there’s not this use, this massive use for food banks in this country. We’ve got generation after generation who cannot cook properly, they cannot cook a meal from scratch, they cannot budget. The challenge is there”

Jess

I’m sure I’m not alone in having been given the talk about needing to be responsible with my money as I took my first steps into independence. Nor in finding that easier said than done once I had control of the purse strings alongside what seems now like far too easy access to credit. Although the comments we’ve just heard from former and current Conservative MPs Edwina Curry, Jake Berry and Lee Anderson drew criticism, they are not alone in believing that those struggling with debt could help themselves by making better life choices. Are they right? Could perhaps a course on budgeting be the most effective help government could give?

Sara Williams
There are certainly people that go through their whole life with never having any debt apart from a mortgage or a credit card which is paid off in full. That's lovely for them. It doesn't mean that everybody else is financially incompetent or illiterate, or in need of cooking lessons because they're spending too much on takeaways or anything like that.

Jess

That’s Sarah Williams, whose experience advising people with debt problems has given her a different view than those perhaps more removed from the realities of a limited budget. As founder of Debt Camel, a website that provides independent and impartial advice on debt management, she’s reminded on a daily basis of the numerous reasons people can find themselves in debt - many of which are out of their control.

Sara

Very often, when I'm actually talking to people with real debt problems, they are masters at budgeting. They know exactly what money's coming in, how they split it up, how they manage, how they get through the month.

People set up their lives around what's happening to them. They plan weddings or holidays, or enrolling children in ballet classes and things, on the assumption that life will go on pretty much as it has gone on. At the start of this year, nobody would have budgeted for their energy bills doubling by this point, and now it looks like they're going to carry on going up further. Nobody could have predicted this, so you couldn't budget for it sensibly.

Against that, we've got a backdrop of a large number of people - the Money and Pensions Service normally says about eight million people in this country that were struggling with their finances before the start of this year. Those people, it's got worse because the things which have gone up in price mostly tend to be the absolute essentials. You can't cut back on petrol if you need to get to work. There's limits to the amount you can reduce your food budget by. And rent and mortgage, they are what they are, they have to be paid. So those people were struggling already and their position has got a lot worse.

And then there’s the sort of big background of real wages not keeping up with inflation, which means that more and more people have negative budgets, the benefit safety net is in tatters. So this is a really complicated picture with people a whole spectrum of people across the whole country.

There's an internet meme going around. It's ascribed to Desmond Tutu, I’m not sure if he actually did say it, which says that, "We're here. We keep fishing these bodies out of the river as they come around the bend in the river. At some point we have to stop fishing people out of the river and we have to go around the bend and find out why they are falling in in the first place." I think that's what needs to be concentrated on. Going back to the idea of financial literacy is like saying we should have more swimming lessons in schools. That isn't actually the problem when people are drowning in this river.

Jess

You’re listening to LSE iQ. In this episode we’re asking, ‘Do we always need to pay our debts?’ I’ve been talking to Sarah Williams, who sees many kinds of financial problems through those contacting her debt advice website. We’ll return to Sarah shortly, but first here’s Joe Spooner, who’s recently contributed to the UK government’s Review of the Personal Insolvency Framework, which sets out the processes for debt relief in England and Wales. Although policymakers do flex support in times of crisis – it’s recent Energy Bills Support Scheme for example – for many, these packages will simply not be enough. I asked Joe how effective this approach is.

Jess

When we hear about support, it's often focused on a specific area.

Joe

Yes, I think that's an excellent point that a lot of policy responses have tended to be piecemeal. So we've looked at different types of problem debt at different points in time after different crises, but we need to take a more global holistic perspective. We need to tackle the problem of household debt head on and we need to tackle it in its entirety. And that's why I look at solutions that involve household debt relief. And particularly that's why I focus on the tool of bankruptcy. So the idea of bankruptcy is that it is a legal means through which debts are discharged or canceled routinely.

One of the appealing features of bankruptcy is that once you have bankruptcy laws in place they can act as what we call automatic stabilizers. The idea that rather than having to design new policy responses every time there is a crisis, if we could put in place certain institutions that automatically kick into gear when economic conditions deteriorate, that might be more advantageous. And bankruptcy could in theory operate like that. I think there's great potential for bankruptcy to offer protection to many households struggling with debt problems, but we probably need to make some key changes in order for that to occur.

Jess

As Joe highlighted at the start of this episode, people will go to huge lengths to avoid declaring themselves bankrupt. But for those who have few other alternatives, could the issue be reframed in a more positive light? In his book on the subject, Joe argues that bankruptcy laws are in fact ideally placed to help those in financial trouble, while offering public policy benefits. He explains.

Joe

We all know that the law generally tells us you have to pay your debts. But since at least the 18th century we've had this idea that if you are insolvent, if you cannot pay your debts, well then the law says you do not have to pay your debts. And once you enter into bankruptcy process, once you comply with the relevant conditions and safeguards and the protections against potential of abuse of the process, et cetera, at the end of the process, your debts will be canceled and you legally will not have to pay your debts anymore.

Now, the beauty of this is that it tackles all manner of financial problems. It's not confined to one particular category of debt. It's not combined confined to one particular sector. The idea of bankruptcy is it that it can look at the whole of a person's situation and can provide them with debt relief across the board. Now there are some exceptions, but that's the general principle. And I think there's a great general appeal to this idea because it can look at the entirety of a person's financial situation and it can provide them with what we call a fresh start, a chance to begin again, a chance to leave behind the historic debt and to move forward in life.

Jess

While many might wish for a fresh financial start, when we borrow money, we make a commitment to paying it back. I asked Joe what he would say to those who might believe bankruptcy laws could be taken advantage of, and that those struggling with debt should simply have made more responsible financial choices.

Jess

Whenever bankruptcy policy is raised, often discussions are based on ideas of personal responsibility and sometimes framed in terms of this idea of moral hazard. The idea that if we offer people protection against certain forms of risks, well does that make them less likely to take precautions against that risk occurring? But bankruptcy laws have been specifically designed to deal with these kind of problems. So once someone enters into a bankruptcy process, there are certain conditions which must be observed, and if there's any suspicion that some dishonesty or recklessness has occurred, well then there are legal tools for actually dealing with that.

I mean, this is a concept that's very familiar in bankruptcy. If we go back in time to the 18th century, when bankruptcy first introduced the idea of debt discharge or debt cancellation it also introduced the death penalty for fraudulent debtors. So there's always been this idea that bankruptcy from the get go has balanced the benefits with these very harsh penalties for abuse of the process. So I don't think we need to worry about this idea of someone entering into bankruptcy on a willy nearly basis, really.

Jess:
How scared are people of the idea though? Because there's a stigma and a shame to being seen as not being able to maybe meet your obligations.

Joe
Yeah, that's a really important point. And look, I'm realistic about this. I'm talking about the virtues of bankruptcy, the way it can operate to help people and to act as a release valve to relieve some of the pressures of our debt-based economy, our economy, which is dependent on high levels of household debt. But the idea is that we've reached a very sorry place when bankruptcy is the answer both for an individual and for a society. So I'm talking about bankruptcy in the context that, to use that awful phrase, we are where we are, right. We are in a society which has become dependent on high levels of household debt. And the reality is there are millions of people in the UK who are struggling every day with household debt problems…

So I'm being realistic here. This is not going to be a panacea. We have reached a difficult position where bankruptcy seems like the way out, and it's very much true that there's a lot of stigma associated with bankruptcy. People generally don't like the concept of bankruptcy. It's a scary idea, it's a scary word. The legal system hasn't done a huge amount to help with that over the years. Historically, bankruptcy has been very punitive. But also I think a big part of the problem is just a lack of awareness, a lack of knowledge. There are lots of myths about bankruptcy, what it involves and what negative consequences will be associated with bankruptcy. And a part of the work that I do is try to have honest, rational conversations about what bankruptcy involves to take away some of this mystery, which can be problematic.

If we can see bankruptcy as being part of the social safety net, as being an undesirable but essential feature of our contemporary debt-based economy and something that we could maybe normalize in that way that could potentially help. But yeah, we have to be realistic about that. We can’t change attitudes overnight

Jess
Sara Williams agrees that societal attitudes make it harder for people to address their financial issues.

Sara
People always say that we're very bad about talking about money in England and I think that extends over to debt. In many ways, debt has sort of become normalized. So you go to university, you get an overdraft automatically. It's normal to get a credit card in your late teens, early twenties, probably long before you actually really thought about managing your finances and what they're going to look like in five or 10 years' time.

I think people were reluctant to say to a friend or somebody they know casually that they're having trouble paying their credit card debt, because it sounds like you're incompetent. Whereas what it actually means is you've fallen into the consumer trap, and the person you're talking to may be in exactly the same position but they're not saying it either. So I think the fact that the problems are so much more widespread and are on the news the whole time, financial problems, in one way it can only be good in the sense that it should be moving some of the mystique about it.

But there's still a lot of problems in the way we talk about debt and credit and things like credit ratings. It sounds nice, doesn't it? I mean, you must want to have a good credit rating because it makes you sound like you're a good human being. You're good at life, you've got a good credit rating. People can go to enormous lengths to try to protect their credit rating. But, in the end, if you can't pay your current bills and debts and have the debts going down each month, then they are going to be going up and freezing the interest, which does harm your credit rating, is the only way forward for that. Credit rating only matters if you need to borrow more money. It's a factor, but compared to everything else that's going on in your life and your ability to feed the children and have a warm home, your credit rating is actually not that important.

Jess
While both reasonable concerns and common misconceptions can be addressed with more openness around issues of personal finance, Sara’s clear that too many of us are still putting off difficult conversations. She reminds me that it’s never too early to explore our options, and that these may be more than we realise.

Sara
The earlier somebody gets help with a debt problem, the more solutions there are and the nicer solutions they are. Go and talk to a debt adviser about your options. They may be able to signpost you to extra benefits you can claim or extra things like social broadband. Very, very much under-claimed. There's the social tariffs for water. You'll probably hear a lot in the next couple of months about a social tariff for energy because that's one of their options for going forward from April.

There is a significant under-claim of some of the major benefits in this country. The benefits safety net is not good at the moment, it hasn't kept up with rising prices and particularly things like rising rents, but there are people who think they can't claim - they don't think it's meant for them. There's another sort of stigma there, the stigma attached to claiming benefits. It's hard sometimes convincing people to actually take that step. So, if you don't think you're eligible for this sort of help, you don't tend to go and look for it.

Jess
What would you say to someone listening to this who might be concerned about their finances?...

Sara
If you know you’ve got problems, you know you’re actually struggling to pay the bills, you’re sort of juggling money around, the first thing you should do is to try and take a snapshot of your situation, list those debts. It might be uncomfortable listing them out. You might be quite surprised at what they add up to. Then, after another month's juggling, do another list and see what's happened. If your debts have dropped, fine. But if they're going up, there may be a very good reason why they're going up.

But if this happens for several months then you're set on a trend which isn't going to go well. You either need to look at what you can reduce in your budget. There may be subscriptions you can cancel. Check what your partner's getting.See what you can cut out - sensible moves you can make. Is that going to solve it? If it isn't, the sooner you talk to a debt advisor the better because the longer you wait and the more your debts go up, the worse your options are. There will still be some options, but you get nicer options the earlier you go and talk to somebody about it.

Jess:
And don't put it off.

Sara
Don’t put it off. I see people who seem to have gone from a position for years who say, "Well, it's not really bad enough to go and take debt advice," and then when things have got bad they go, "It's so bad debt advice won't really be able to help me."

Go and talk to a debt advisor about your options, and if you go early and the debt advisor thinks you can manage, then they will give you some useful information. Even if you decide not to proceed, you know what your options are if things get worse in the future. If you leave it really late so your debts have got bigger and bigger and bigger, your options are much smaller and they're much harder and they're not so nice. So, if people can come earlier or find out a bit about debt options earlier, then their journey through and improving their situation should be easier.

Jess
Of course it’s not realistic to think that everyone will seek help at the right time – or that all those that do will follow the advice given. With an economy built on borrowing, and a growing number unable to pay the bills, do we always need to pay our debts? Here’s Joe Spooner.

Joe
It depends how you want to look at this, right? Do you want to look at this from a moral perspective? Do you want to look at this from an economic perspective? There's many different ways we could look at this problem, but I guess my main point of view would be that we should all pay our debts up to a point. And then a point is reached, whether that's a societal tipping point, whether that's a tipping point for the individual, whether it's a tipping point for our economy, at which point it no longer becomes beneficial to force people to continue to pay their debts, right.

So I'm happy that I'm in the fortunate position of being able to pay all my debts and I think it's the right thing for me to continue to do so. But there are certain points at which it no longer becomes socially, economically, morally productive to force people to do so. And what I'm really interested in looking at bankruptcy is how we find that tipping point and where we as a society can agree is the point at which we no longer have an expectation that people should pay their debts in a given set of circumstances. So I guess the answer is that no, we should not always have to pay our debts, but it's a trickier question to find out exactly when we might be satisfied that we will no longer require someone to pay their debts.

Jess
I asked Sara Williams the same question – is debt something we always need to pay? She points out that getting into debt in the first place isn’t simply a personal responsibility.

Sara
I think our society is set up to encourage people to take out debt, and at some point it's not actually your fault if you've got into a situation where you have too much debt for your current situation to pay it back.

So, things like freezing the interest can solve some problems. For larger problems, perhaps if you've actually just now got a sick child to look after, or you're getting towards retirement, even if the interest is frozen on your debts, there's no chance of you paying them off within a reasonable time.

Almost every society around the world has some form of insolvency option as the option there. It should be seen as a normal way to, when you've got yourself into an impossible situation either because you've made mistakes or life events happened to you, or some combination of the two of them very often, then you need a clean start, and that's good for you, it's good for your family, it's good for the rest of your life. You're not going to be able to save up for your pension if you're paying back debts constantly.

It's also good for the rest of society, because if all your money is going towards debt repayments, you're not taking the children out for a meal once a month. You're not going to your local cinema. You're not spending anything in your local shops. So the fact you can't spend any of your money on what's going on in the local economy is actually bad overall for the whole economy, which is why insolvency is a sensible option for a lot of people, and it may be one that a lot of people need to consider over the next few years.

Jess

This episode was produced by me, Jess Winterstein, with editing by Maayan Arad and Oliver Johnson. If you’d like to find out more about the research in this episode, please head to the shownotes. And if you enjoy LSEiQ please leave us a review. Catch us next time, when we ask: how can we solve the refugee crisis?