Unemployed debt rising fast – may pose problems for recovery

Retired and unemployed debt-worriers have seen their debt rise in the last five years, as a proportion of income. Employed and self-employed people had less of a debt burden in 2010 than they did in 2005.

Unemployed debt rising fast enough to prove a real burden when they re-enter employment.

Unemployed people who have sought ClearDebt’s advice in the last year have seen their average  unsecured debt to take home pay ratio rise sharply in the last year.

In 2009 unemployed people’s average debt stood at 271% of take home pay but, in 2010, it rose to 314%. This is based on a sample of 59,111 of whom 5,059 were unemployed. Retired people were the only other occupational group where the debt to income ratio got worse last year, rising from 252% to 271% (Our sample of retired enquirers is much smaller – only 808 individuals).

debt levels by occupation groupAcross all occupational groups debt/income has got easier in the last 5 years. In 2005, the average enquirer owed, in unsecured debt only (ie, excluding the mortgage) 199% of their annual take home pay. In 2010 this figure had reduced to 148%. Even amongst unemployed people (and despite last years sharp rise in debt to income ratio), the situation is less bleak now than in 2005, when they owed an average of 327% of take home income in unsecured debt.

The situation is easiest for employed people – who have seen a steady easing in debt to income from 176% of take home pay in 2005 to 120% in 2010. The self employed too have seen their debt to income ratio drop (2005: 247% – 2010: 191%) but are substantially more indebted than those who work for someone else. My advisor colleagues tell me, anecdotally, that the habit of financing their business needs from personal credit cards and loans is one the self-employed find it impossible to give up. Self-employed debt to income did not drop in the last year which may indicate some are finding times tough.

Debt worriers comparison against unemployment ratesThe proportion of our debt enquirers that are unemployed is consistently a few per cent ahead of the proportion one would expect when compared with the UK’s unemployment rate – which is probably no great surprise. I think the sharp rise in debt to income ratio in this group should worry people in government because it also comes at a time when unemployment has risen sharply and looks set to continue marching upward. The chickens may not come home to roost until these people find jobs again but, if and when they do, they are going to be entering employment with a debt burden they will find difficult to service and in sufficient numbers, I guess, to have an impact on any growth we are expecting to come from consumer spending. New and effective debt resolution procedures could make a big difference here.

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