Unsustainable debt levels ‘need to be tackled’

Too many households in Britons have unsustainable levels of personal debt.

This is according to Paul Hackett, director of the Smith Institute thinktank, who is worried the situation is only going to get worse in the future before any progress can be made. 

Recent figures from the Money Charity show that outstanding personal debt stood at £1.428 trillion at the end of September 2013, with the average household debt in the UK excluding mortgages £6,020.

On top of this, a report by the Office for National Statistics shows that since the onset of the financial crisis, median household income for the overall population has fallen by 3.8 per cent. 

This demonstrates how consumers need to take control of their finances before it is too late – burying their head in the sand will only make the situation worse. 

Household debt

Mr Hackett stated household debt has grown steadily over the past ten years and this is not because of austerity. 

"Adults are struggling to manage their money. An inability to manage personal debt can bring distress and unhappiness not only to the individual but also … friends and family. Furthermore, it has a proven negative impact on society and the economy," he added.

The expert added indebtedness is a complex issue, as there are usually a mixture of cultural, psychological, educational and socioeconomic factors at play, especially when it is people on low incomes who are affected. 

Indeed, the Money Advice Service recently revealed that 8.8 million UK adults have serious debt concerns and so a range of methods – including regulation – may be required in order to mitigate the situation. 

Today's situation

The Smith Institute found that 25 per cent of households feel burdened by debt and they can be categorised in one of two distinct groups; £12,000 debt with some assets or £2,000 debt with low assets. 

Moving forward, the body expects tomorrow's borrowers to be shaped by key socioeconomic and demographic trends and drivers, such as the increase in single-person households; a less generous welfare state and a rise in people renting privately long-term. 

In terms of the best way out of debt, the institute recommends investing in skills training, encouraging the adoption of the living wage and providing more advice.

Debt management 

With 285 people declared insolvent or bankrupt every day, which equates to one person every five minutes and three seconds, it's clear action needs to be taken. 

An individual voluntary arrangement (IVA) is suitable for people who owe at least £5,000 in debt and is typically open to anyone who has a reliable monthly income.

The legally binding agreement allows consumers to freeze interest and charges on their unsecured debts and write-off any debt that has not been repaid within the terms of the IVA.

People will also be able to reduce their monthly repayments to a much more manageable level, while it also means they avoid starting bankruptcy proceedings. 

By James Francis