UK Personal Debt: A Crisis?
The figures make chilling reading. Personal debt in the UK, including mortgage balances, has doubled in less than 10 years. As at the end of September 2006 it stood at £1,258bn equating to an average household debt in the UK of £50,918, according to figures supplied by Credit Action. Many experts are warning of a ‘financial meltdown’, but are their warnings merely scare-mongering or is there a real personal debt crisis in the UK? A simple enough question that is much harder to answer or quantify.
Most analysts, such as Datamonitor, point to a “rampant buy-now-pay-later culture” prevalent throughout the UK and argue that it is unsustainable. New legislation has enabled people with severe personal debt problems to be able to take drastic action to write the debt off and start again. High street banks are reporting a surge in bad debt provision; HSBC alone wrote off £361 million in credit cards and personal loan debt for the first six months of their financial year and other banks are reporting rises in bad debts as much as 37% in one year.
The main reason that the debt ‘crisis’ doesn’t appear to have resulted in widespread misery is because many mortgage holders are exploiting the strength of the housing market to fund their spending habits. They ‘liberate’ equity within their property by adding any unsecured debt to their mortgage. So long as house prices continue to rise and so long as you are a homeowner with a guaranteed income then there won’t be a problem. The average house price is currently in excess of £200,000 way above the average debt level so, on paper, the debt can be absorbed. However, if the house market stalls, if you don’t own your own home, or if you don’t have a guaranteed income, then you could be in the throes of a debt crisis.
If your debts have grown to the point where all your income is going on repayments and you can’t afford to live then what can you do? There are a large number of organisations that can help, such as the Citizens Advice Bureau or the Consumer Credit Counselling Service. They will help you assess the size of your problem and what options are available to you. Or, there are also a number of online practitioners who also offer the same service. The first solution, and the one that will have least impact on your credit worthiness is debt consolidation. This is where you get a loan big enough to pay off your other unsecured debts. You then make one monthly payment instead of several different ones spread throughout the month, but the main advantage is that your debt will start reducing. However, to get a loan such as this your credit record must be good or excellent, if you have a poor credit record then you must consider other alternatives.
Debt management is a scheme where a debt management company negotiates what you can afford to repay each month to your creditors and handles everything on your behalf. You pay the sum to the debt management company and they distribute it to your creditors. But, the debt management company will charge a percentage for this service. According to your individual financial circumstances you may also be able to negotiate Individual Voluntary Arrangments (IVAs) with your creditors. This is a legally binding arrangment overseen by a licensed insolvency practitioner and helps you avoid the ultimate solution of bankruptcy. By declaring yourself or being declared bankrupt you will be absolved of your debts but you will have to pay an amount each month determined by the official receiver. You will also be severely restricted in what you can and can’t do with regards to finance and running companies. After a certain period you will be discharged and free to start building your financial and credit history again.
Whether there is a debt crisis that will be detrimental to the UK is open to question. However, what is beyond doubt is that debt levels are rising, and more people are seeking help and advice than ever before. If you need advice get it now, before your situation gets worse.
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