The number of people struggling with their debts looks set to double during 2008 as the clampdown on lending will limit their refinancing options, according to a report published today.
It is estimated that about one million people have “problem” unsecured debts, and that these add up to £25bn – an average of £25,000 each, according to debt management solutions firm TDX Group, which issued the findings. Its clients include lenders such as HSBC, HBOS and Alliance & Leicester.
About 60% of this money is owed on credit cards, with the rest mainly personal loans.
The report, entitled UK Problem Debt – consumer crisis or efficient market? warns that changing economic conditions, including the property market slowdown and an increase in personal inflation, will result in more people facing financial difficulties.
It adds that the recent credit crunch and stricter lending practices will have a major impact on the solutions available for people looking to manage their debts.
A spokesman said: “There will be fewer refinancing solutions such as re-mortgaging and homeowner loans available, because banks and building societies have tightened up their lending criteria. This could mean there could be a doubling in the number of people taking out repayment plans such as individual voluntary arrangements (IVAs) and debt management plans.” IVAs are an alternative to bankruptcy that allow borrowers to restructure their debts. Last year, an estimated 58% of people who were unable to keep up with their debts refinanced them or remortgaged to make their repayments more manageable.
The company urges those who find themselves in difficulties to shop around for the best solution for them. The majority of people who take out a debt solution sign up with the first organisation they contact, despite fees from IVA providers varying from £5,000 to £9,000.
Meanwhile, up to 45% of people fail to complete their IVA – these typically run for five years – with 15% dropping out during the first 12 months.
Mark Onyett, chief executive of TDX Group said: “These issues need to be addressed urgently, as we expect strong growth for the debt management market during 2008.” The number of people becoming insolvent unexpectedly dropped last year for the first time in nine years, but experts have warned that 2008 is likely to set another record as debt problems mount.
The most recent government figures, issued in February, showed that personal insolvencies in England and Wales fell 4% in the final quarter of 2007 to 24,846 – a drop of 16% from the same period in 2006. That left the overall total of people declaring themselves insolvent during 2007 just below the previous year’s record levels.
The level of bankruptcies rose 2.4% during the year, although a fall of nearly 5% in the number of IVAs pulled the overall figures down.
Most commentators agree that the drop does not point to a downward trend.