Debt is not worth dying for!

According to the FSA Financial Risk Outlook 2005, more than a quarter of families have at least one credit card on which the outstanding balance is not cleared each month, owing nearly £2,500 on average. This figure is 14 per cent higher than last year's.

A new study, by Combined Insurance, finds that, if unemployment struck, two thirds of borrowers would default on personal loans and credit card debt within three months, and more than 40 per cent would fall into arrears on mortgage payments.

Easy credit has its benefits but it also has serious pitfalls for the unwary. Average household debt in the UK is approximately £7,694 excluding mortgages, and £44,857 including them. The average owed by every man, woman and child in the UK is an eye-watering £18,454.

This is a pretty horrific figure when you consider that children are, of course, not allowed credit, and many older people will have paid off their mortgages and be relatively debt-free. So the conclusion must be that, where the burden of debt falls, it falls heavily. There is no doubt that the credit binge we have been collectively enjoying as a nation is not only coming to an end but has claimed some victims on the way.

It is easy to see how debt can become overwhelming. While a number of high-profile cases have hit the headlines, when people with debts have tragically taken their own lives, many others are living lives of horrific stress, trying to juggle payments and satisfy the persistent demands of creditors - often borrowing from one company to pay another.

Most people need to borrow money at one time or another. The majority of us will have a mortgage, many will take out a loan for a big purchase, such as a car or furniture, or simply overspend from time to time and become overdrawn at the bank until the next paycheque drops.

Problem debt levels soar

Problems arise, however, when spending gets out of hand - such as uncontrolled credit card debt - or personal circumstances change, such as the loss of a job, the breakdown of a relationship or ill health.

Citizens Advice says that the annual number of consumer debt problems its counselling service has dealt with rose by nearly three-quarters over the past seven years, Bureaux dealt with nearly 1.1 million debt-related issues last year, a figure that included housing, utilities and benefits-related debts.

But consumer debt is by far the biggest type of debt problem for which people come for help. A quarter of those in debt are receiving treatment for stress, depression and anxiety from their GPs.

The golden rule for anyone having trouble paying off debts is to face up to the fact and seek help as early as possible. Not opening letters from the bank will not make the problem go away, and simply borrowing more money to meet credit payments is storing up a bigger problem for the future.

If your debts are not too bad, and your problem is likely to be a short term one - for example, you ran into arrears when you became unemployed, but now you have a new job - just talking to your lender should do the trick.

Nothing makes lenders angrier than thinking they are not going to get their money back and that you are ignoring them. You are likely to find that they start enforcement action against you to make you pay, and you could end up with a county court judgment against you that will affect your credit rating for years to come. However, if you go to see your lender, you have a reasonably good chance of getting them to allow you to reschedule the loan, to give you more time to pay.

When matters are more serious, it is time to seek professional debt counselling help. Make sure you contact a reputable free-of-charge service, such as the charity Consumer Credit Counselling Service (free helpline 0800 138 1111); Citizens Advice, or the free industry-sponsored Payplan , which should be able to help you to come to an arrangement with creditors to reschedule your debts.

Beware of the debt 'cowboys'

Avoid any organisation that claims it can help you with your debts but charges you a fee for doing so. And certainly do not take advice from any organisation that offers to lend you more money to get you out of debt.

You may, in some circumstances, be advised to take out a "consolidation loan" to help you reschedule your debts, or to move to a lower rate of interest, but the advice should come from an independent, impartial party who can help you to shop around for a good deal, and not from someone trying to sell you yet another expensive loan.

In particular, be wary of anyone suggesting that you should add your debts on to your mortgage, because, if you find it difficult to meet the payments in future, you could end up losing your home.

If things are really bad, there is always the nuclear option of declaring yourself bankrupt - or allowing yourself to be declared bankrupt by a third party.

Citizens Advice has disclosed that as many as three-quarters of the people it is counselling in the past couple of months are being advised to declare themselves bankrupt, because of the overwhelming nature of their debts.

The Department of Trade and Industry (DTI) has recently announced that bankruptcies have hit a 45-year high. Figures just released show that there were 15,394 individual insolvencies in England and Wales between April and June this year, the highest figures since records began in 1960.

This is an 11.7 per cent increase on the previous three months and a rise of 36.8 per cent year-on-year. "These figures do not paint a pretty picture, and cannot be unrelated to the huge rise in mortgage repossessions and the increasing bad debts reported by consumer lenders recently," said Steve Treharne, head of personal insolvency at accountancy giants KPMG. "We have a major consumer debt problem, and, if current trends continue, we could see annual bankruptcy rates at double the present level before we see any improvement."

Bankruptcy is a last resort

Declaring yourself bankrupt has become a more attractive option since the Enterprise Act of 2003 reduced the period of bankruptcy from three years to 12 months. In many cases discharge can be even sooner, if the Official Receiver files a notice with the court indicating that the investigation of the bankrupt's affairs is unnecessary or concluded.

However, bankruptcy is really only a suitable option for people with no or very few assets, as, apart from a few essentials, all your possessions, including property, can be sold to pay your creditors. If you own your own home, or part of it, that can be sold, too, to realise your share of the equity to meet your debts. And even when your debts have been written off, effects can continue for many years.

Jill Stevens, Director of Consumer Affairs at the credit reference agency Experian, says, "More than 5,000 people have gone bankrupt since the Enterprise Act came into force in April 2004. This new law cut the average length of time until discharge from three years to just one year. Although for some bankruptcy is the best solution, it is important that people do not see it as the easy option to rid themselves of their debts. Bankruptcy has some very serious repercussions that will affect the debtor for many years after they have seen their bankruptcy order discharged."

Even when a bankrupt is discharged, it is unlikely that companies will be keen to lend to a former debtor again. Ms Stevens says, "Their discharge may come after only one year, but it will remain on their credit report for six years, so gaining credit during this time could be very difficult. In addition, they may have to declare their bankruptcy when applying for credit even after this date.

"People really have to consider bankruptcy as a last resort. There are many organisations that can offer help and assistance when people are experiencing financial difficulties, and I would strongly urge them to ask for help as soon as they can, and not to let the situation get worse."

People who have been declared bankrupt are also forbidden from being elected in council elections, standing for Parliament or managing a limited company, whether or not as a director.

A less dramatic solution could be an Interim Voluntary Arrangement, or IVA. This is an arrangement between the debtor and his/her creditors to repay a percentage of the debt over the life of the IVA, usually five years. Payments are made under the supervision of an insolvency practitioner. At the end of the IVA any outstanding debt is usually written off.

An IVA will still affect your credit rating, and will be included on your credit file for six years, but it does not have the stigma that is attached to bankruptcy. Also, while your home and assets can still be put at risk with an IVA, if creditors insist on them being included in the order, it is more usual for creditors not to require sale of a family home except for the possible release of some of the equity available at the end of the five-year IVA period.

What it is important to remember is that debt is never worth dying for!

There is always a way out of financial difficulties - and the sooner someone in debt faces up to the problems, the sooner they will be free of them.

16 August 2005 © Moneyextra.com

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