Severe debt problems ‘to get worse’

The number of people in severe debt who are unable to pay it off is set to rise, an expert has predicted.

Editor of the Cash Questions website Annie Shaw suggested the next few years will see a "divide in society" as two groups emerge, one of which will be gradually reducing and eliminating their debts, while the other will find their fortunes heading in the opposite direction.

The expert identified the former group as being unwilling to take on any new debt, while they act to reduce what they have.

Such a financial approach is something people who have sufficient leeway in their budgets to refinance can undertake, as they will not need to borrow to make ends meet and may be able to pay a bit more off debt such as credit cards to reduce this faster.

Discussing the latter group, Ms Shaw stated: "There are people who really can't help their debts. They are seeing their debts rise because if they have got fixed payments and fixed expenses they are seeing inflation, and the cost of the things they need to buy going up, so they are going to see their debts rise and that is a really big worry."

She predicted this group of people is set to rise in the near future.

People in this situation may find the amount they owe rises to £15,000 or more, the figure at which an individual voluntary arrangement (IVA) may be sought.

This is a form of insolvency, but unlike bankruptcy is it's a confidential measure, agreed with creditors, which involves reduced payments being made.

It becomes binding on all creditors if 75 per cent of them agree to it, with the duration of an IVA being five years or less.

Those considering this option may benefit from seeking good advice on the pros and cons of an IVA when compared with other options.

IVAs have overtaken bankruptcy in recent months as the preferred form of insolvency, with the number of bankruptcies last exceeding the IVA tally in the first quarter of 2011.

By James Francis