According to the Money Advice Service, there are more than eight million people in the UK living with problem debt, with one in six people struggling to cope with the money they owe. Problem debt is defined as people who find keeping up with their regular bills and credit commitments a “heavy burden”, which can lead to finances spiralling out of control.
Britain has more than £45 billion more personal debt than it did a decade ago. Unsecured debt today stands at a staggering £225 billion compared to £179.5 billion in 2009, with the average household financial debt increasing by 9% to £9,400. What’s more, problem debt is thought to cost the UK £8.3 billion through the damage it causes to family life, mental and physical health, productivity, employment prospects and costs to the welfare state and the local government.
But no debt is unsolvable, and every problem has an insolvency procedure or solution - so if you are struggling with problem debts, read on to discover the different options available.
What are the indicators of problem debt?
A person is in problem debt if they are unable to afford their debt repayments, are in arrears on outstanding debt obligations, are struggling to meet repayments, or say their debt is a heavy burden. In fact, the biggest indicator for any individual that they may be suffering with problem debts is if they are paying credit with more credit - and worryingly, at least six million people in the UK are thought to have done this within the last year.
Alongside this, other indicators of problem debt include relying on credit to make it through to payday, making minimum monthly repayments on credit cards, falling behind on essential household bills, regularly going over the limit on cards or overdrafts, being hit by late payment charges on a regular basis, and having to borrow following unemployment or ill health.
Who gets into problem debt and why
As the cost of living continues to rise, anyone can get into problem debt - however there are some trends. For starters, one in three people in problem debt are lone parents, whilst one in five are job seekers and one in nine are couples with children. Credit cards are the main culprits that keep people in debt, because unlike a loan they have no repayment plan - which can cause people to enter a debt spiral.
It’s a slippery slope: half of people in problem debt take on even more debt, with interest and fees continuing to increase the debt size. And lenders encourage this bad behaviour, with nearly 20% of people in problem debt having had their credit limit extended without the lender asking. What’s more, people don’t seek help soon enough, with just 10% of people in problem debt seeking advice.
What are the solutions?
There are many solutions for anyone struggling with financial issues - in fact, the biggest problem we face is when people don’t talk about their problems. Not all insolvency procedures are life-changing, but all of them will help you sleep at night! From budgeting heavily to organising and arrangement with your creditors, there will always be an insolvency procedure to suit your situation:
Individual Voluntary Arrangement
If you owe more than £15,000 in unsecured debt, you might qualify for an Individual Voluntary Arrangement (IVA). A repayment plan will be drawn up for a set period of time based on what you can afford, not what you owe; after the time is up any remaining debt will be written off. An IVA is a legally binding agreement which protects you from legal action by creditors - and your home and assets are usually protected, too.
Debt Management Plan
A Debt Management Plan (DMP) is an arrangement between you and your creditors where you pay them a reduced repayment each month proportionate to your available income. If you find yourself in a temporary sticky situation, a DMP could be perfect. However, there is no set time period, so the plan can either be used as a short term fix or for longer if necessary. Your home and other assets are also usually protected.
If you owe a large sum of money and are struggling to make the repayments, bankruptcy is a common yet serious insolvency procedure that wipes away both secured and unsecured debts. You will usually be released from restriction after 12 months, meaning you can make a fresh start without the debt - however, bankruptcy is a legally binding procedure and it shouldn’t be seen as an easy way out.
Debt Relief Order
A Debt Relief Order is a solution for individuals whose debts are under £15,000. It’s intended to help those with little or no assets, or those who can’t afford to make themselves bankrupt. A Debt Relief Order acts in much the same way as bankruptcy in that you will be released from the debt you owe once the time period is over.
How McAlister & Co can help
If you are experiencing two or more of the problem debt indicators, you should seek expert advice as soon as possible. At McAlister & Co, we are proud to have a specialist team who will offer you free, professional advice. As personal insolvency experts, we help hundreds of individuals with debt each year, from procedures that reduce or write off your debt or solutions that simply give you some breathing space. If you need help then contact us today.