Debt burden ‘continues to climb’

Britons are suffering from an ever-increasing burden of debts, new research has indicated.

A survey by the Consumer Credit Counselling Service (CCCS) has revealed that at the end of the fourth quarter (Q4) of last year the average household paid nearly £200 per month, equating to 23.8 per cent of disposable income.

The CCCS Consumer Debt and Money Report Q4 2011 found that this was 0.1 per cent up from the third quarter of 2011, even though average interest payments dropped by £2 a quarter, with the share of disposable income being increased due to a squeeze in the latter caused by inflationary factors.

And with this struggle comes an increased desire for solutions, as the demand for debt help has continued to increase. And even if the economy gets better, the indebtedness will lag behind, it seems, as the report indicated the level of need is likely to peak in 2014. It stated that middle-aged and older people will be among the worst-affected, with a major shift in the average age of a CCCS client from 28 per cent being aged over 45 in 2005 to 47.6 per cent by the end of 2014.

The survey also encountered some inconsistencies between the need for debt help and actual demand, with the former rising at the fastest rate in Wales and the Yorkshire and Humber region, but people in London and the north-west being most likely to seek assistance. 

In response to the news, the charity has said it will publish regular reports on the ability of households to meet such costs.

CCCS chairman Lord Stevenson remarked: "While debt levels continue to decline, interest payments are a growing burden on too many UK households."

For people whose debt problems are so severe that maintaining payments is impossible, an individual voluntary arrangement (IVA) may be the best option.

These are potentially available to consumers who have debts of more than £15,000, for whom the repayments may in fact be a lot more than 23.8 per cent of income.

It works through a deal with creditors by which they accept smaller repayments each month, which are made in fixed amounts over a period of no more than five years, after which any remaining debt is written off.

This can be a very effective way out of debt and exists as an alternative to bankruptcy, which means that people do at least manage to take responsibility for some of the repayments.

And unlike bankruptcy – which carries a social stigma and can be publicised in the local press – an IVA can be kept entirely confidential.

However, consumers do need to bear three things in mind before seeking an IVA.

The first is that it still counts as a form of insolvency and therefore will severely affect the customer's credit file for the following few years, although many taking one out might be quite happy not to be borrowing any more money for a time.

A second consideration is that the deal can only be passed if at least 75 per cent of creditors agree to it.

Thirdly, the regular payments still have to be maintained each month, so discipline is required to avoid breaching the agreement.

However, IVAs are more popular than bankruptcy, according to Insolvency Service figures.

Its statistics for the final quarter of 2011 revealed there were 13,047 IVAs, compared with just 8,626 individual bankruptcies.

By James Francis