Mental illness and debt: what are the rules?

Last updated: 1 May 2022   By Dr Lucy Brown, Editor

Mental illness and financial troubles often go hand in hand, with customers struggling to find a way forward.

Customers who need advice can turn to debt support agencies, as well as potentially accessing the Breathing Space scheme for those in problem debt.

Financial providers are becoming more aware of their responsibilities thanks to guidance from the likes of the Financial Conduct Authority (FCA), but this is guidance rather than regulation.

Unfortunately, the best way to ensure that our mental health problems are taken into consideration by companies is to disclose our issues to them and push them to follow the appropriate guidance when dealing with our case.

mental health
Credit: Emily frost/

In this guide:

How to handle debt and mental illness

Debt and mental illness can be a difficult combination to deal with.

Taking action and tackling the problem before it becomes worse will limit the damage in the long run, although this is not always straightforward or easy.

Here are some steps to consider taking.

Seek debt help

Anyone can access free assistance with debt, but those with mental health issues may find it especially useful to understand what their options are.

Organisations like StepChange and the National Debtline can offer advice and provide support for customers struggling with debt.

We've got more information on where to get help with debt as well as a list of five things to know when dealing with debt.

Plus, find out more about the differences between debt charities and debt management companies or, if the problem is energy debt, we've got a guide to energy grants for unpaid bills.

Talk to your financial provider

Mental health issues can be an intensely personal situation that we might not want to disclose to companies we're in debt with.

It's entirely our choice whether to let providers know we're struggling with mental health issues but telling them means they may make reasonable adjustments to their procedures to make things easier.

We cover those more in the section below, but bear in mind that some creditors may request evidence of a mental health issue before deciding how they should deal with a specific case.

Although discrimination is still a reality for many, attitudes towards mental health are shifting towards acceptance. This means that firms are having to follow suit - most will try to follow good practice guidelines.

Sending an email or making a phone call explaining symptoms and financial situation can often convince a creditor to be more thoughtful in dealing with a customer who has mental health issues.

The earlier this is done the better, as it could (for example) stop a bank from selling debt onto a third party.

With our permission, relatives and friends should be able to speak to creditors on our behalf. If we don't feel we can talk calmly to financial providers, speaking to them long enough to get permission for someone else to have the discussion about the next steps could be a useful option.

If a 'casual' conversation or appointment doesn't help, the next step is following the firm's formal complaints process. This should be detailed on their website.

Contact the ombudsman

The Financial Ombudsman deals with consumer credit complaints among other things.

If talking to and filing a complaint with a provider doesn't help, they are the next port of call. They must be contacted within six months of receiving the final communication from the financial firm, and within six years of the action complained about.

Take legal action

Going to court is stressful under almost any circumstance. It's certainly not easy for people with mental health problems.

For some, though, it's the option that makes most sense. If this is the case, contacting the advice organisations we mentioned is a good idea - they will have experts to give further advice.

What are the rules around debt and mental health?

There are several laws and codes of practice that affect how banks and other financial organisations might deal with a customer with mental illness.

In addition, the Breathing Space scheme offers more immediate protection for customers in mental health crisis, so we'll look at that first.

Breathing Space

The Breathing Space scheme was introduced by the Government in mid-2021 and offers legal protection to customers in problem debt.

Under the scheme, people in severe financial difficulty can contact a professional debt advisor to help address the problem and will be given 60 days 'breathing space' from enforcement action such as letters and bailiff visits.

This time is designed to help people with problem debt figure out a strategy to get on top of their debts.

If a person is receiving treatment for a mental health crisis and this can be certified by a professional, the 'breathing space' will be extended until 30 days after the end of their treatment rather than expiring while they may still be in crisis.

Breathing Space is a way for those in debt to take a step back and look at how to address their debt problem in the long-term. It could be of particular use to those with mental health issues who are becoming more stressed and anxious by debt enforcement.

Equality Act 2010

The Equality Act says that service providers, including creditors, must make 'reasonable adjustments' for those disadvantaged by a disability or 'mental impairment'. Most mental illnesses would be covered by this definition (although substance addiction is not covered).

Some creditors might want evidence of mental illness, such as a copy of a letter confirming an appointment, or a copy of a prescription.

Examples of possible reasonable adjustments:

  • Putting specially trained staff onto the case.
  • Agreeing to make contact via letter rather than phone (if phone calls make the debtor anxious).
  • Allowing extra time to gather information etc.
  • Agreeing to delay collection procedures for a short time.

If a provider has acted in a discriminatory fashion, the consumer can complain. Examples include:

  • The creditor refusing to communicate in a way the consumer can deal with (e.g. by talking to someone authorised to call on the consumer's behalf, or insisting on communication via phone call when this increases anxiety).
  • The creditor sold a product (e.g. a loan or credit card) without fully explaining it or making sure the consumer understood the consequences.

Complaining to the bank or debt collection agency itself might be helpful, especially if the Equality Act is mentioned in the letter.

Taking it further can be stressful and time consuming, but occasionally necessary.

Legal routes could be making a claim against the creditor or by claiming discrimination if the creditor takes legal action about the debt.

The Mental Capacity Act

The Mental Capacity Act 2005 deals with what should happen if a person lacks the capacity to make decisions for themselves. This includes financial decisions.

If someone borrows money while they didn't have the capacity to properly understand what they were doing - for instance, during a manic episode - the law still sees it as an enforceable contract by default.

To have the contract cancelled, it must be shown that the creditor knew or should have known about the reduced mental capacity.

Good Practice Awareness Guidelines

The Money Advice Liaison Group (MALG) publishes a Good Practice Awareness Guidelines for Helping Consumers with Mental Health Conditions & Debt.

That's a bit of a mouthful, so it's usually shortened to Good Practice Awareness Guidelines.

The third edition, released in 2015, was put together by creditors, advisers, consumer policy experts and psychiatrists. Although the guidelines within are not compulsory, they are acknowledged by the Financial Conduct Authority (FCA) - so they're widely seen as important.

The guidelines for creditors and debt advisers include:

  • Taking steps to establish a consumer's ability to manage debt and other financial matters.
  • Having specially trained staff to recognise the impact of money issues on mental health and vice versa.
  • Communication between financial institutions, advice agencies and social and healthcare professionals.
  • Recording and protecting relevant information appropriately.
  • Referring consumers to relevant advice resources when necessary.
  • Only outsourcing debt collection to companies that will treat people with mental illness appropriately.
  • Being reasonable about evidence of mental health (the type of evidence needed, the amount of time to gather it etc.)
  • Considering "writing off" debts under circumstances when a mental health condition leaves the sufferer unable to repay, and is unlikely to improve.

Read the full guidelines on the MALG website.

BBA guidelines

The British Bankers Association (BBA) released guidelines in 2016 that drastically improved the recommended ways of dealing with vulnerable consumers.

The BBA guidelines stress increased training for staff, including recognising 'triggers' that could alert them to a consumer needing more support. They also focus on better relationships with the carers of vulnerable people.

FCA vulnerability guidance

Customers with mental health issues may also want to refer financial providers to the guidance published by the FCA in February 2021.

The publication is a good practice guide designed to inform firms about the different markers of vulnerability. As many people with mental health problems exhibit these markers, the guidance can help companies understand how to deal empathetically with them.

The FCA is also clear that characteristics of vulnerability are likely to overlap, so a person suffering a bereavement may develop low emotional resilience.

While the guidance is too technical for most readers, mentioning them when talking to debt advice services or financial providers may help.

What should change?

While the MALG, BBA and FCA guidelines represent progress, the issue needs specific legislation surrounding mental health and financial institutions.

The Money and Mental Health Policy Institute (MMHPI) made suggestions in their November 2019 "Money and Mental Health General Election Manifesto" (ahead of the December 2019 General Election).

The charity laid out five ways to improve 'mental and financial wellbeing' in the UK. Paraphrased, they are:

  1. To address the link between suicide and financial problems.
  2. To have the NHS provide money advice.
  3. To support people with mental health problems in work - and in finding work.
  4. To stop firms making money off people's mental health issues.
  5. To make it easier for carers to help their loved ones with financial issues - and safer for the person being cared for.

Each of these points is complicated in its own right, so to meet all of them will be quite a challenge for any Government. But having comprehensive manifestos from organisations like MMHPI should help map out possible improvements.

So far, we've seen the improved guidance from the FCA but, as StepChange pointed out at the time, it's guidance rather than law, so firms may not always offer the same level of support and consideration across the board.

Mental health issues are strongly linked to financial issues.

This can turn into a vicious cycle: poor mental health saps the motivation to deal with finances, which leads to money problems and financial stress, which makes the mental health issues worse.

Which mental health issues affect finances?

There are lots of mental illnesses that can hurt a person's financial health. For example:

  • Many mental illnesses lead to time off work, or reduced performance in the workplace, which can affect income and career progression.
  • People with bipolar disorder experience 'manic' high periods of impulsivity. Many people spend lavishly during these times - often getting in debt to do so.
  • Depression can leave sufferers lacking the motivation or willpower to deal with financial issues.
  • Anxiety about phone calls, meetings and opening letters can lead to falling behind on bills and then being unable to deal with the consequences.
  • ADHD can mean disorganisation with financial matters, falling behind on bills etc.

On top of these direct consequences, mental health problems can cause knock-on issues with money. When someone is low, spending money can provide a dopamine hit - a short burst of relief or happiness. Of course, too much of this can make things worse.

Summary: Take advice on debt

Organisations like the MMHPI have long called for changes to the way banks deal with mental health issues.

The FCA agrees and has implemented guidance to ensure firms treat customers with mental health issues more fairly, but it is disappointing that there is still no change in the law to better protect those customers.

For anyone struggling with debt alongside mental health issues, the first thing to do is seek help from a registered charity like Citizens Advice or StepChange before engaging directly with the provider.

If there is a problem debt issue, ask about the Breathing Space scheme or learn more generally about what to do if you can't pay all your bills.

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