Drowning in debt
Monday, 15 February 2010 02:19
This month the Insolvency Service released a very grim set of figures showing the number of people becoming insolvent had rocketed by a worrying 25% in the last year Kate Saines looks at what you should do if you're worried about your debts.
The recession might be over, but personal debt, it would seem, is at an all time high.
And the official insolvencu figues, say debt charities, are just the tip of the iceberg. They don't account for all the individuals who have not taken up advice to become insolvent or who are using other debt management methods.
The Consumer Credit Counselling Service (CCCS), a charity which supports people in debt, saw an annual increase last year of 93% in the number of insolvency recommendations.
And there was a 31% increase in the number of people who were advised to go bankrupt.
Their figures paint an even more depressing picture than the 'official' statistics released by the Insolvency Service.
Delroy Corinaldi, of the CCCS, says: "Although there have recently been positive signs in the economy, our figures highlight the high numbers of people with unmanageable debt, for which insolvency is the most appropriate solution."
Insolvency and bankruptcy are of course the very last resort, so the fact so many people were offered this escape route is testament to the scale of the debt so many people are facing.
But this could only be the tip of the iceberg given the number of people who may not have even sought debt counselling and are suffering with the burden of the debt in silence.
Part of the problem is identifying when debt has become unmanageable while the rest revolves around a lack of knowledge of the steps that can be taken to deal with debt.
Warning signs that you might be starting to fall into serious debt will come if you are unable to make repayments on any loans, credit cards or finance agreements. This could occur because of a large expense or because of a change in circumstance - losing your job, for example.
The CCCS said alarm bells should also start ringing if you find you are only able to make minimum payments on your credit card each month.
If you start using a credit card to repay debt, have no idea how much in total you owe and have begun lying to your friends and family about spending, then things are probably pretty serious.
Identifying you are in too deep is often the first step in turning the problem around, however.
So if you are in this situation you don't need to feel powerless.
Una Farrell, of the CCCS, says anyone in serious debt should try taking the following practical steps to begin remedying the problem.
1. Make a Budget
This is the first step towards being in control of your finances. "When you can see where your money is going it is easier to make savings and make sure that you account for all your needs," Ms Farrell says.
The idea is to write a list of all your current incomings and outgoings on a monthly basis. And then look at ways of cutting back. CCCS's Debt Remedy tool provides help with making budgets.
2. Increase your Income
If you are still struggling, even after the budget cuts, you need to look at finding more money to repay your debts. This could include looking for a second part-time job or checking you are claiming all the benefits you are entitled to. Anyone with grown-up children could ask them to pay some housekeeping.
3. Reduce your spending
Small changes can make a big difference and Ms Farrell suggests checking to see if there is a cheaper utility provider who could help you lower your bills.
"Visit price comparison websites," she says, "to compare prices of gas and electricity suppliers and switch online to get the best deal. Look to see if you could reduce your telephone bills by switching to a better deal."
Switching to own brand supermarket products and taking advantage of special offers can also help reduce spending.
So, you've tried all the above and are still finding it hard to keep your head above water. What's the next step?
This is when credit counselling can help. The CCCS offers this service online 24 hours a day or by phone between 8am and 8pm. But there are other organisations around offering this service including the National Debtline and Citizens Advice Bureau.
Avoid companies which offer 'debt advice' in the form of a consolidation loan or other similar product. They are not counselling services but lenders attempting to sell you yet more debt.
These counselling services can offer you these courses of action to help repay your debt.
1. Debt Management Plan (DMP)
This is a plan which helps people manage their debts when they cannot repay creditors due to financial problems. It involves the person or household in debt working out a monthly budget they can live on, then any surplus cash is used to pay debts.
The DMP can be organised by the person in debt, or by a third party such as a debt counselling organisation. Many companies provide debt management as a service, but they will charge a fee for this. Charities such as the CCCS will provide the service free of charge.
2. Settlement Offers
DMPs, says Una Farrell, aren't for everyone. So there are other alternatives including settlement offers. These are for anyone who has a lump sum of money - earned through the sale of their car, property or receiving a gift - which can be offered as a one off payment to clear debts.
The offer can be less than the outstanding amount, and some creditors might accept this as the full payment.
However many creditors will not accept this. You must always get written acceptance of your full and final offer before you send money to creditors, Ms Farrell warns.
3. Individual Voluntary Arrangements (IVA)
This is when the person in debt comes to a legally binding arrangement with creditors that they will pay an affordable set monthly payment over a fixed term, usually five years.
Ms Farrell says: "If you keep to the arrangement, your creditors will not chase you for payment. They will also not add any more interest to your balances unless you are able to pay the debts in full during the term of the IVA."
This option is a form of insolvency so any unsecured debts you have must outweigh the value of any assets you have, such as your property.
While there is much those people in debt can do to take control of their financial situation, many industry commentators think the banks must still take some responsibility.
Tim Moss, head of loans at Moneysupermarket, says: "Some may argue that it was the all-too-easy availability of credit that got many debt-ridden borrowers into their current financial mess.
"But unless the banks start lending again allowing consumers to switch from expensive products to cheaper ones, this rise in insolvencies will surely continue."
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