Debt collection from benefits – necessary, or deepening hardship?

Attachment orders are instructions from the court to deduct money from wages or benefits to pay back a debt.

The debt could be from an outstanding utility bill or unpaid credit card or other loans.

While attachment orders can be made against wages, Ministry of Justice figures show 84% are placed against benefits.

It’s easier for debt collectors to apply for an attachment order on a benefit, rather than track down a debtor’s employer, Tim, a financial mentor at Auckland Central Budgeting told us.

Every week, $601,473 is being paid out from benefits to debt collectors under attachment orders.

While we don’t dispute that debts should be paid, we are concerned that the debts appear to largely relate to unpaid bills for essential services – such as power, phone and rent – along with loans. We’re also concerned that using attachment orders is putting people into further financial hardship.

How many attachment orders are there on benefits?

Latest data, which Auckland Central Budgeting obtained from the Ministry of Social Development (MSD), shows that in June 2023 there were 24,540 attachment orders placed against benefits.

Each week, this amounts to $601,473 being paid out under the orders, mainly to debt collectors.

The total amount of debt waiting to be repaid is just over $154 million.

The data shows that women, Māori and Pacific people are disproportionately impacted by the use of attachment orders.

Women, Māori and Pacific people are disproportionately impacted by the use of attachment orders

What is the debt?

Victoria Stace, senior lecturer at Victoria University of Wellington, has conducted research on attachment orders based on conversations with financial mentors, in association with FinCap, an umbrella organisation for financial mentors.

As well as credit card debt and unpaid utility bills, some tenancy-related debt was also common, along with debt from finance companies and car loans. Buy-now-pay-later debt has also become an issue in more recent years, Stace said.

Tim, from Auckland Central Budgeting, said they also see clients with historic car loans, and loans that were probably unaffordable in the first place. He said that some lenders weren’t following all lending laws because the penalties weren’t high enough.

“We see some egregious breaks of the law,” Tim said.

Jake Lilley, from FinCap, said once an attachment order is in place, and the beneficiary comes to a financial mentor, it’s hard to see whether the debt is from a historical breach of a consumer’s rights; meaning, it’s hard to determine whether the loan should have been given in the first place.

Pushing people into further hardship

Community advocates have been concerned about attachment orders placed against benefits for some time.

In July 2023, a group of advocates wrote to government ministers asking for an immediate moratorium on attachment orders against all benefits. The advocates claimed attachment orders cause “significant financial harm” to affected families and punish people who are already “experiencing poverty and financial hardship”.

Most attachment orders take $30 out of a person’s benefit.

Yet, when a judge sets the attachment order amount, they don’t often consider what other repayments could be coming out of the benefit. Often, this is because the borrower isn’t in court when the judgement is made.

Tim explained that some clients, “have their head buried in the sand the whole way through the process and they haven’t engaged, they don’t want to know about it, they will ignore the court documents, or the court documents will be sent to the wrong address, the address given to the court isn’t the correct one, because all they need is a date of birth to get it to go through.”

Often, it’s not until people are seeing a financial mentor to work through their financial hardship that they become aware of the attachment order against their benefit, Lilley said.

Clients may also have debt owing to MSD from benefit overpayments or recoverable assistance or fraud. People may also owe money to Inland Revenue or the Ministry of Justice. This debt is tallied separately to attachment order debt owed to third-party collectors.

Currently, MSD can’t deduct more than 40% of a client’s net income. MSD told us that child support payments take precedence over all other reasons for a benefit deduction, including attachment orders.

Yet, taking nearly half of someone’s income when they’re already strapped for cash is putting people into further financial hardship.

Auckland Central Budgeting told us about a client whose total income from MSD was $452.74 per week. Once his debts were taken out of his benefit, he was left with $356.74.

The client’s rent was $270, which left him with just $86.74 for other weekly expenses.

Lilley, from FinCap, said attachment orders are “causing challenges for the financial wellbeing of whānau already struggling financially”.

MSD staff are instructed to tell clients that they can contact the registrar of the court for a reassessment of the attachment order. Yet, some clients may not feel confident following through on that process without the help of a financial mentor.

Ministry of Justice figures show that in 2023, only 197 debtors applied to cancel, vary or suspend an attachment order. While debt collectors made over 18,000 successful applications to have an order varied.

What’s more, the number of attachment orders has grown during the current cost-of-living crisis, with the total number up 32% since 2021.

The number of attachment orders has grown during the cost-of-living crisis

How much the debt collectors collect

As of June 2023, $154 million was the total amount of outstanding debt that was being retrieved from benefits using attachment orders.

The debt collection agency with the most money being collected was Intercoll Ledger, with 22.5% of the total, or $27 million due to be repaid. Every week, $208,308.90 is deducted from benefits to pay debt lodged with Intercoll.

This was followed by JFS Recoveries with a total $17 million outstanding in June 2023, and $60,222 collected against benefits each week.

The Tenancy Practice Service came in third with over $44,000 coming out of benefits every week.

Another financial mentor we spoke to at Auckland Central Budgeting – Teresa – wondered whether using attachment orders is the debt collectors' business model.

“It would be interesting whether they could continue the business model without it. I mean, honestly, because it is so much money.”

We asked the three debt collectors that received the most money what methods of debt collection are tried before applying for the attachment order.

Intercoll told us, “recovery through the court system is a last resort”. Before applying for an attachment order, it tried to engage with customers in multiple ways over “an extended period of time and explored all other options”.

“Our business model places our duty to our customers at the heart of all our decisions, so we prefer being able to engage positively to establish a voluntary resolution.”

Those options include a debt management plan, referrals to financial mentors, and at times pausing collection based on a customer’s situation, a spokesperson for Intercoll said.

JSF told us its business procedures are commercially sensitive.

Tenancy Practice Service told us that the majority of the debt it collects is preventable as it’s typically “for damage and cleaning to rental properties” rather than rent arrears.

“If attachment orders were not available to landlords, this would over time further drive up homelessness as landlords would vet tenants more carefully and any tenant that has had a debt in the past, would be declined a tenancy,” the Tenancy Practice Service spokesperson said.

We also asked the three debt collectors how they knew that a debtor is a beneficiary, what percentage of the attachment orders they have on their books are for employees compared to beneficiaries, and whether they passed on the cost of applying for the attachment order to the debtor – but didn’t hear back before publication.

Intercoll did say that if an attachment order is established, but is unaffordable, “we will apply to adjust the court ordered amount to meet the customer’s needs”.

It also said it welcomed a wider discussion on the attachment order process, and “whether it could be improved to better support both creditors and the community”.

What needs to change?

New Zealand is seeing a cost-of-living crisis play out, and many beneficiaries are struggling to cover the basics. With access to easy credit that can never realistically be paid off, as well as the ongoing cost of food, housing and utilities often outstripping how much money is in the bank, attachment orders can often be the final nail in the coffin for entrenching poverty.

In February this year, a member’s bill was presented to parliament that proposed to limit how much a creditor can deduct from a benefit payment to 5% of the net benefit received.

The bill was thrown out.

In Australia, attachment orders can’t be applied to benefits. However, a creditor can make a claim against an individual’s bank account.

In the state of Victoria, beneficiaries cannot be subject to a creditor’s claim at all.

Community advocates here are calling for the same protection as in Victoria. Until it’s in place, they want to see a moratorium on attachment orders against all benefits.

At the very least, Victoria Stace says, the court should be required to ask for more detailed information on the beneficiary’s financial situation before making the attachment order.