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).

Across 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.

The 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.

People with the lowest incomes saw their indebtedness rise last year (2010), unlike every other income group where indebtedness appears to have slowly, but steadily fallen since 2005, according to ClearDebt’s debt worriers’ data (more than 59,000 records of people in debt).

According to data from CreditAction British household’s unsecured debt peaked in 2008 (£9,663) and has declined since (£8,556) – note that the figure is much higher if you eliminate households that have no unsecured debt. CreditAction’s data is the broad pink line in the chart below (and relates to the right-hand axis).

ClearDebt’s data shows that those seeking our advice who had take home incomes of less than £10,000 (per anum) have consistently had a much higher unsecured debt to income ratio than any of the higher income groups. In fact, it’s bobbed around at just under 300% most of the time, apart from 2009 when the pressure eased a tiny bit – and just for a short while.

The data I’ve used this time includes both unemployed and retired people and in my next blog I’ll look at debt to income by different “occupational” groups. I’ve also, at the suggestion of @Chris_Goulden tried to find external data to add context to ours. I Will continue to try to do this and am happy to have suggestions of sources we might use.

In this case, our data and external data show a marked contrast. CreditAction data shows unsecured debt rising over the period 2005-10 as a whole and peaking in 2008. ClearDebt’s enquirers’ data shows a steady decline in the ratio of debt to income – but with a flatter line in 2008. Average incomes in each band have pretty much flatlined over the period too, so the cause of this declining debt to income ratio certainly isn’t that people are earning more.

My feeling, just based on what we know about other aspects of debtor behaviour, is just that debtors are beginning to realise that letting debt fester doesn’t help anyone and that the “take action early” message is beginning to hit home. For me, this even helps explain why the ratio of debt to income isn’t changing amongst the lowest income groups: They don’t have the option of early action, simply because their debt, which will often be from door-step or short term (pay-day) loan providers is always with them – attached to interest rates that you can’t make headway into if you fall behind.

I’ve been looking at a sample of nearly 24,000 debt-worriers who are also home-owners and who approached us for advice between 2005 and 2010.

Home-owners have traditionally often used debt-consolidation as their preferred route for making credit card and unsecured debt more affordable: “The value of the house has gone up – let’s slap the credit cards on the mortgage” (it costs less per month, it might cost more in interest charges in the long run).

Well, in these straitened times, does that still apply? The answer is that things, in some cases may be looking a little rosier – but, for once, it seems the most well-off amongst us may have more to worry about than those at the bottom of the pay scale.

First, amongst our enquirers, average unsecured debt exceeded equity in 2008 and 2009. In 2010, equity rose and overtook debt once more – quite sharply in fact.

Over the period, the average unsecured debt owed by all enquirers has come down too – so there might be room for consolidation in theory. In practice, there isn’t – because the banks aren’t lending to anyone other than their best customers – and people with substantial debts don’t often fall into that category.

We looked at average property values too – arranging the data to show the average property price for each year amongst home owners whose take-home pay fell into 6 bands between <£10,000 and more than £50,000.

Not surprisingly, the less you earn, the less your house is worth. Possibly surprisingly (I really must go and look at some property websites) the properties losing the greatest proportion of their value were those owned by the wealthiest respondents. Between 2005 and 2010, properties owned by people earning more than £50K had declined in value by 13%. Properties owned by enquirers in the lowest two income bands (<£10K and £10-£20K) had actually risen (well only be a per cent or three - but they'd not declined).

The biggest issue, when it comes to using your house as a money-well for debt repayment, is negative equity: If your house is worth less than you paid for it, then debt-consolidation is never going to happen.

I think this issue is particularly significant because, for many years now, the better-off have assumed than, barring the odd hiccup, their house is always going to enable them to turn short term, expensive, unsecured debt into long term, affordable, mortgage debt.

Well, I suspect there is a small crisis waiting to happen here - Higher earners  who have made this assumption may well have increased their unsecured debt, just to make ends meet, over the last year or two, confident their property is going to bale them out.

Well, one in four of them won't be able to.

I was really surprised by the chart above. Every income group except the highest, returned exactly the same result for each year we looked at. In 2010, therefore, 10% of every group except those that earned £50K-plus had a house that was worth less than they’d bought in for. In contrast, 23% of those in the highest income band had lost the ability to use their house to fund their other debt.

Is debt always with us? Well, for some, it would appear so. One unfortunate debt worrier who came to us had debt that would take more than 694 years to repay!

I’ve been taking a look at the people on our database who say their income is bigger than their outgoings (ie those that aren’t bust) and trying to work out how much effort it would take to become debt free. Aside from our number one debtor (with seven centuries worth of credit card and unsecured loan repayments – our figures exclude mortgages) we had  14 enquiries from people whose debts would take more than a century to repay and 45 enquiries from people who would take more than 50 years – and our estimates are based on all interest and charges being frozen: So, these periods, in the real world, would be in debt for an awful lot longer. We shouldn’t get things out of proportion though – these were a handful of cases in the context of the sample of  50,113 employed and self-employed people I was working with.

Mind you, once you get into the nitty gritty of the sample, I do think there are some things worth worrying about. OK, technically, these people are able to make some contribution to their debt (unlike the last blog group I looked at last time, whose outgoings exceeded their income and who, therefore, were getting deeper in debt every month). But 6% of them would take (assuming interest and charges frozen) more than ten years to repay what they owe and 44% would take more than two years (arbitrary I know, but I reckon that having unsecured debt the principal alone of which will take you more than two years to repay using all your disposable income is probably a decent measure of “problem debt”). Here’s a chart with the figures in more detail.

Looking across the sample and not just at the hard cases it is clear that the less you earn, the more difficult it is to repay your debt. Nothing new there I guess. However, I think it is worth noting, bearing in mind this sample is of people who were worried enough to approach ClearDebt for debt advice, the huge difference between the lowest and highest earners.

Those who take home (after tax and NI) less than £10,000 a year would take, on average, 13 months to repay all their debt (assuming interest and charges were frozen and they used all their disposable income to do it). Those taking home more than £50,000 a year would, on average (and making the same assumptions) take just two months to become debt free. And they were still worried enough to seek our advice!

Prompted by zero-credit’s latest blog, I decided to take a quick look at ClearDebt’s user data relating to the income of people who ask us for debt help to see if I could back up their assertion that “problem debtors have low income”.

To an extent, ClearDebt’s data does back this up – but it also shows that, whatever you earn, there is still a significant chance that you could wind up owing a lot more than is comfortable.

(Remember, the ClearDebt sample I used is of people who were worried enough about their personal debt to approach us for advice about a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA) – so they tend to be more than a little worried about their finances. The sample I used  was 59,793 records – that, I think, is pretty substantial. It also excluded unemployed people – so the proportions of lowest income households are likely to be a little low).

What I found was that 20% of the people who had come to us for help earned less than £10,000 a year (AFTER income tax and national insurance). Across the UK, 10% of households earn less than £10,000 after deductions – so someone, at this level of income, seems twice as likely to be worried about debt than we would expect.

whatever you earn, there is still a significant chance that you could wind up owing a lot..

People who earn between £10,000 and £20,000 yearly, after tax, are a little more likely to be worried about debt that one would expect.

This is around the level of Britain’s average annual wage – so it looks like you can divide people into two groups – the lowest half (in terms of income) of UK households are more likely to have debt problems than not. The higher earning half are less likely to have debt worries.

But, even the most well off have some debt worries: There is no level where they completely disappear.