Caught In a Debt Spiral
Latest analysis from EuroDebt reveals that a quarter of debt management plan clients struggle to manage a multitude of debts
Leading debt management provider, EuroDebt, has recently analysed the reasons for clients signing up to its Debt Management Plan. Of the clients who signed up in the last 6 months, EuroDebt found that a quarter (25.16%) said they needed help because they were caught in a spiral of debts. Kevin Still, Director, EuroDebt believes this is highly indicative of the fact that consumers who were managing a careful balancing act of income and debts have been tipped over the edge by increased living costs in the first half of this year.
"The enormous rise in the cost of living that we have seen this year has, undoubtedly, had a huge effect on consumers. In particular those families and individuals who were managing a fine balancing act with various credit agreements and, perhaps, had a great deal on a fixed rate mortgage that has now to come and end, could have seen their outgoings increase by more than £300 per month. If their income hasn't changed then this is bound to make life very difficult and we are finding a number of our clients are in this situation. They don't want to put their home at risk - which would be the consequence of bankruptcy or an IVA - but they do need professional help."
Loss of income was the second highest reason for consumers turning to EuroDebt's Debt Management Plan at 19.78% although this is not necessarily redundancy, retirement or unemployment. "This could simply be that they were working in a sector where overtime was a key part of their earnings - but this has been cut back, reducing their earning opportunities", confirmed Kevin Still.
Bad financial management - at 16.82% - was the third top reason for turning to debt management, which Kevin Still believes is also related to the significant change in the economic conditions in the first half of this year. "A number of clients blame themselves for the situation they face in terms of unpaid debts. But the reality is that, for many, they simply can't cope with the juggling act needed when using credit to pay off credit - especially as the availability of credit has been so markedly reduced in the aftermath of the credit crunch."
Other reasons were:
- Divorce/Separation - 13.4%
- Unemployment - 7.58%
- Redundancy - 3.07%
- Birth - 1.48%
- Retirement - 0.59%
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 12 months to 3 years or a long-term plan that enables them to become debt free, potentially with some equity release for home owners in the future. The flexibility of a debt management plan sometimes allows clients to resume contractual payments where creditors accept EuroDebt's proposals a reasonable offers for a transitional period until the client's circumstances change, for example; find new employment, return to work from long-term illness or maternity leave.
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 predicted increases in energy costs of around 30-40% or more and snowballing fuel and transportation costs and the effect is that many consumers who previously could just about juggle their monthly budgets are seeing a significant reduction in their monthly disposable income.
"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."