Be Careful What You Cancel

April 2008

Leading debt management company advises consumers in debt to maintain important insurances

According to recent reports, more than 3 million home owners are set to see mortgage repayments rise from anywhere between £30 and £300 each month as fixed rate deals come to the end with no realistic option to re-mortgage to an equivalent rate. Add to this the pressure on day to day living expenses caused by increases in council tax charges, home fuel price rises and other living costs and it is likely that many families could be looking to make some big cuts in their outgoings just to keep their head above the water. Leading debt management provider, EuroDebt, is warning families and individuals struggling to meet payments to be careful what they cut and to take advice.

"The problem is that as soon as people start falling behind on their payments they look for the easiest way out" confirmed Kevin Still, Director, EuroDebt. "And unfortunately that can mean cutting payments that don't feel like they are priorities - such as household contents insurance, life insurance, medical insurance and even critical illness and payment protection policies.

"Even worse, we have seen in February the highest level for unsecured loans in five years to £2.5bn, at a time of falling mortgage lending, falling home equity withdrawal and weak credit-card lending this suggests many struggling consumers are trying to borrow their way out of financial difficulty that may not be sustainable in the medium term.

"Indeed, it is just this sort situation where those dropped insurance policies could be vital if things get worse in the future. This is especially true when individuals start getting into arrears and they come under the spotlight of unsecured lenders. Whilst some of the recent changes in the Banking Code regarding treating customers fairly (TCF) are welcomed, many consumers who haven't ever been chased for payments can be very naïve when put in a situation where creditors start pushing hard for contractual payments when they fall behind. And this can even be to the detriment of keeping up mortgage, rent, council tax and other priority payments."

EuroDebt aims to help consumers take a responsible position with their creditors, especially where they have multiple credit cards and loans, by notifying the unsecured lenders that they have entered a Debt Management Plan. This involves no further borrowing and in the majority of instances lenders agree to freeze interest & charges, meaning that recovery activities stop, the debt balance will begin to reduce at a rate based upon the negotiated reduced payments to creditors and the consumer can begin to take control of their finances again. This may be for a relatively short period ranging from 6 months to a year or a long-term plan that enables them to become debt free, potentially with some equity release in the future.

EuroDebt is the only fee paying debt management company to make home visits as a core component of its "fact find" process, ensuring a complete picture of each individual's situation. At this visit, the debt advisor is able to assess not only priority expenditure, but also some of the insurance products that should be linked to the mortgage and the household. Creditors will always want to know whether there is payment protection insurance (PPI) against any of the credit cards or loans, unfortunately in EuroDebt's experience many of the policies have been breached or the client has never been eligible to make a claim.

"In terms of affordability of debt the underlying facts are bleak", concluded Kevin Still. "Interest payments reached nearly £94 billion in 2007, an increase of 13.2% on 2006, which highlights one of key factors squeezing UK consumers. Add to this misery 15% increases in energy costs, snowballing fuel and transportation costs and insurance premium increases to cover the weather, terrorist and other "risk based" events that seem to be ever present in the newspaper headlines and the effect is that many consumers who previously could just about juggle their monthly budgets are seeing a reduction in their monthly disposable income of upwards of £250.

"For an average household with net monthly income of £1,600 to £1,700, this is the difference between debt being affordable and unaffordable. Add one or more changes in household circumstances like; separation, divorce, a retirement, redundancy, long-term illness or loss of one income through maternity/paternity leave and you have an unmanageable debt situation. It's vital, therefore, that in these circumstances families and individuals take advice to avoid making the wrong decisions in terms of how they manage their finances going forward."

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