Past Articles for July, 2006

It fears that some people are living lavish lifestyles thinking that they can have debt wiped out as a bankrupt, when in reality the consequences could affect them for as long as 15 years.

To highlight its point, the Insolvency Service has given examples of “reckless behaviour” to show the dangers of running up debt. Examples include those incurring credit with no prospect of repaying, gambling and those who took lavish holidays without paying creditors.

The warnings come as official figures show that bankruptcies have rocketed in the past eight years.

Anyone declared bankrupt will have access to credit restricted for between two and fifteen years, which the Insolvency Service says is often the result of people spending recklessly.

However, advice is available for those looking to get out of their debt without becoming bankrupt and many people are turning to Individual Voluntary Agreements (IVAs) as an alternative.

“There’s no penalty for past mistakes for people who choose to use an Individual Voluntary Arrangement, though they would have to put their lavish lifestyle behind them,” David Mond, chief executive of ClearDebt, said.

“IVAs reduce debt, freeze interest and are carefully calculated to be affordable, but they still require people to do their best to repay an agreed proportion of what they owe.”

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John Borgars of Equity Development claims that the households would be unable to cope if they were hit by unexpected illness, injury or redundancy.

“For the last eight years, Britons in aggregate have been spending more than they earn resulting in a gradual build up to a vast number of individual crises,” warned Mr Borgars.

His comments come from his study of the Financial Services Authority’s figures, which is also backed up by other data.

The charity Credit Action claims that two million people are overdrawn as soon as they are paid on payday and 3.5 million are permanently overdrawn, meaning that they are the most at risk.

With unsecured borrowing on credit cards and other loans rising, Mr Borgars warned that millions of people are at risk of debt because they have not made plans for disasters.

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The campaign group, Debt on Our Doorstep, wants to see a limit put on the credit interest to ensure that those people being targeted, often the most vulnerable members of society, do not fall even deeper into debt.

Interest on the small loans can vary from 160 per cent right up to 800 per cent and the market is under investigation by the Competition Commission.

Niall Cooper, part of the Debt on our Doorstep campaign, commented: “Although there is now widespread awareness of the harmful effects of extortionate and predatory lending in poor communities, the government’s response to date has been woefully inadequate.

“We hope that the Competition Commission, which is due to report shortly on the outcome of its inquiry into the home credit market, takes a much firmer line.”

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Encouragingly, many people would be happy to shun life in the fame limelight if they could guarantee themselves a place on the property ladder, getting by financially and achieving equilibrium between work and life.

Produced by Churchill, managing finances and being able to clear debt came eight and ninth in the list of top ten life challenges.

Churchill’s Frances Browning said: “It can be easy to sit around dreaming of winning the lottery, accepting our work/life balance as the norm and putting things off until the ‘right time’.

“Sometimes, it’s not about waiting for good things to happen to you, but more about starting to make them happen for yourself.”

Money was cited by two in five people as the one thing that prevented them from leading the exact life that they wanted, whether that be bringing up children or having the perfect job.

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Bad debt charges rose from £22.5 million to £44.5 million, but the company was still able to increase its profit growth target by five per cent.

Its chief executive, Adam Applegarth, pointed the finger at the change in UK bankruptcy laws, which he believed had been badly implemented by the government.

Speaking to the Times, Mr Applegarth added that this had resulted in many more people turning to Individual Voluntary Arrangement (IVAs).

“We have seen a number of ambulance-chasers springing up and chasing business for IVAs by advertising on television,” he said.

But ClearDebt marketing director, Andrew Smith, stated that IVAs were “here to stay” and that they were in the best interests of creditors as they would get more money back.

He said: “IVAs will only be advised if it is the best option for the client, and that almost always means it’s the best option for creditors too – and it’s the creditors that pay the IVA fees, not the client.

“Creditors ought to start taking more of an interest in the fees charged by IVA providers as low fees, like ClearDebt’s, can make a big difference to the returns they get.”

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According to John Borgars of Equity Development, many firms set up to help people clear debt charge fees which can add to their problems.

He praised ClearDebt for its affordability, in contrast to firms such as Loanmakers, which collects a ten per cent commission from lenders on the value of each loan it sources for them.

“I shudder to think what sort of margin the lenders expect,” wrote Mr Borgars. “When people are desperate, they will pay almost any rate of interest, which is why we used to have laws against usury.”

His report comes as more people are prompted to take debt advice after spiralling debt levels affect the country.

Mr Borgars warned people to look at charges or recommendations that some debt management or advice centres give to ensure that they do not pay too much to get themselves out of debt.

Click here for further information on the Equity Development report.

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Price comparison website uSwitch has criticised lenders for dropping monthly minimum repayments to as little as two per cent of the balance, arguing that this makes borrowing more expensive in the long-term.

Nick White, head of personal finance at uSwitch, questioned why lenders would be less stringent with repayments at a time when levels of personal debt are rising, with many borrowers struggling to clear their debts.

“By reducing the minimum repayments to a level that makes credit cards seem more affordable and allowing customers to repay smaller amounts each month, borrowers are retaining their debt over a much longer time frame and paying more interest,” he said.

Mr White added: “Our investigation has found that the total interest repayable more than doubles, and the balance will take nearly twice as long to repay, when comparing cards where only a two per cent monthly repayment is required rather than a three per cent minimum payment.”

More than ten lenders have cut minimum repayments from three per cent to two per cent in the past two years, with more than 50 providers now allowing minimum repayments of just two per cent.

uSwitch argues that there is no justification for such a low figure.

However, it is clearly popular with borrowers, with 3.4 million credit card holders choosing to make only minimum repayments each month.

ClearDebt chief executive, David Mond, says: “Paying the minimum on all your cards is often a subconscious admission that you can’t deal with your debt.

“People in this position should look into their debt management options and take advice as to the best route to becoming debt free.”

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High levels of student debt mean that the majority of graduates are increasingly sceptical of their chances of getting on the property ladder.

The need to clear debt before saving up for a deposit means that more than a third of those polled by debt consultants Thomas Charles anticipated waiting three years before buying their first home, while a quarter expect it to take up to five.

Moreover, a quarter say they cannot conceive of buying property for the foreseeable future, with six in ten blaming the difficulties of clearing debts first.

“For many, the idea of getting on the property ladder seems a distant prospect and for a quarter it seems impossible,” said Thomas Charles director James Falla.

Figures show that just one in ten alumni that graduated since 2001 now own their own home.

Just one in three students surveyed had managed to avoid debt during university. For the rest, six in ten have to clear debt of more than £10,000, while one in ten owe more than £20,000.

Debt resolution experts ClearDebt believe that the outlook for seriously over-indebted college leavers is considerably less rosy than even this survey indicates.

ClearDebt chief executive, David Mond, said: “Forget saving for a house, those ex-students who are most seriously in debt have little or no credit left to deal with expensive life-changes like redundancy, relationship splits or starting a family.

“Almost no-one plans for these events and those who owe more than one and a half times their annual take-home pay are likely to find they can’t cope if something unexpected strikes.”

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John Borgars of Equity Development said that ClearDebt was cheaper than competitors which typically charge over £4,000 per case they handle.

In addition to the lower charges, he added that ClearDebt sought these fees from other sources rather than an individual already coping with debt problems.

“The real significance is that ClearDebt claims its fee from the financially sophisticated party…. instead of the debtor who knows that they are in a mess, is financially unsophisticated, usually has no means of judging the reasonability of the fee and would not feel able to reject a proposal,” wrote Mr Borgars.

Writing an analysis of the debt management services, Mr Borgars praised ClearDebt for not referring clients to debt consolidation companies which can offer interest rates up to three times what banks offer.

He also singled out the website’s ‘Debt Analyser’ tool for helping people determine the level of help they need cheaply and easily while still giving face-to-face interviews.

Mr Borgars said that it showed that ClearDebt went one step further than rivals while also maintaining a network of hundreds of insolvency practitioners.

Click here for further information on the Equity Development report.

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The report’s authors believe it will help people avoid getting caught in a debt trap and gives advice on how to use cards without getting into debt.

“It’s clear that credit card debt is one of the major factors of personal debt in the UK so we hope The Credit Card Debt Report will help people who are worried about credit card debt as well as those who simply want to find out how to avoid the credit card debt trap,” said John Porter of The Debt Counsellors, which commissioned the report.

The report has been issued as personal debt levels reach £1.2 trillion and the British Bankers’ Association saying that credit card borrowing went up by 16 per cent in May.

In addition to giving the facts and figures about credit card debt, the report also claims to explore the reasons why people owe money.

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