There is nothing wrong with the British economy itself. It is growing at a good pace with inflation just above the target. But the economy of a large number of individual British citizens seems to have been rendered unmanageable by consumer credit which to an extent is essential to keep the national economy growing.
But it is more a question of when to stop for two, the consumers and the creditors rather than discontinuing the scheme itself. At the moment it seems that both have gone on a lending and spending spree like they are doing in Pakistan.
As a result, the number of people becoming insolvent has jumped in the UK by 55 per cent over the past year, official figures have revealed in the latest evidence of Britain’s mounting personal debt problems.
A total of 27,644 individuals filed for insolvency in England and Wales in the third quarter of 2006, an increase of 5.7 per cent on the previous quarter and up 55.4 per cent on the same period a year ago.
In the wake of these figures the numbers of debt-laden individuals opting for controversial “Individual Voluntary Arrangements” (IVAs) have jumped up dramatically.
IVAs are the “half-way house” to bankruptcy in which individuals reach a legally-binding agreement with their creditors to reschedule their debts and reduce their monthly payments.
In a typical IVA, after five years, the individual is able to walk free from their debts. Crucially, debtors are usually able to keep their home, unlike bankrupts who can have it taken off them by creditors.
Experts said the explosion in insolvencies has been prompted by a surge of newly-launched debt management companies using aggressive television advertising techniques to sell IVA services.
Debt Free Direct, the UK’s biggest IVA company, revealed a 101 per cent rise in turnover and said its profits would be “significantly more than double” that of 2005. Profit margins in IVA business are believed to be around 50 per cent.
Many blame reckless lending and endless loan mail-shots by banks and credit card companies for pushing people into ever worsening debt problems.
The typical debtor is younger and more likely to be female than at any point in the past, and that expenditure in excess of income is the root cause – 83 per cent of those surveyed blamed excessive spending for their debts.
IVAs are controversial because they allow debtors to freeze interest on debts and make affordable monthly repayments. Debt-management companies are usually able to negotiate with banks and credit card companies to accept a greatly reduced sum. Consumers in trouble typically pay back 50 per cent of the total owed, although it can be just 25 per cent.
Last month the internet bank Egg warned that it was likely to make an unexpected loss because customers were spending less on their credit cards and turning to debt-management companies to control their fast-rising personal loans.
Newspapers quoted Damon Gibbons, chair of the anti-poverty group, Debt on Our Doorstep, said: “The big rise in the number of IVAs reflects the fact that more people are getting into debt problems. Lots of companies have entered this market attracted by the size of the fees but the lack of regulation of this area is a concern. In some cases, people are being pushed into IVAs when it might not be the most appropriate measure to take.”
There are also concerns that home buyers are taking on debts that could quickly become unmanageable following a series of interest rate rises, especially if the property market declines. PricewaterhouseCoopers said there was a one in three chance of house prices falling by 2010.
The number of consumers with spiralling debts jumped by more than 10 per cent over the last year, heightening fears that a rise in interest rates will result in thousands more families facing bankruptcy.
The Department of Constitutional Affairs data showed that lenders started 34,626 repossession actions in the three months to September, the highest figure since the early 1990s.
Some opposition members have called on the government and major lenders to tackle the problem of rising personal debt. They argued that banks and other finance companies were often lending to vulnerable people, many of them already in debt.
Experts said tens of thousands of people opt for an individual voluntary arrangement which can cut their debts by up to two thirds. Others turn to specialist lenders that consolidate loans in one “super loan”.
Both options can involve paying large commissions to private debt advisers. While catalogue and mail order debts remain the largest source of problems, accounting for 824,000 enquiries, housing debt was one of the fastest rising categories.
Of the 127,000 housing debt problems brought to the attention of concerned groups nearly 10,000 related to threatened repossession and 2,000 involved actual repossession.
These figures bear out the findings of a survey published in September showing that some 770,000 people had missed at least one mortgage payment in the previous 12 months.”
David Harker, the chief executive of Citizens Advice, a charity was quoted by the Guardian on Wednesday saying: “Our debt enquiry figures are deeply worrying. They suggest that a growing number of people are getting deeper into unmanageable debt it will be difficult to recover from.
Many of our clients already face a lifetime of debt and research we published in May found it will take them an average of 77 years to pay off the money they owe at a rate they can afford.”
Mr Harker added: “We are particularly concerned by the sharp rise in enquiries from people getting behind with mortgage payments and having trouble paying council tax, gas and electricity bills, at a time when court action that can lead to repossession is on the increase, and fuel prices are rising steeply.
“This is likely to lead to more people than ever experiencing the sort of serious debt problems our advisers are already seeing day in day out.”