Warning that thousands of Britons are on the verge of debt disaster

18th November 2010

With increasing living costs and a downward pressure on incomes, thousands of Britons are predicted to begin to struggle to meet their debt payments in 2011. We consider the actions that can be taken to control the negative effects of a serious debt problem.

At first sight the official insolvency statistics suggest the number of people in serious debt is falling. Certainly protected trust deed numbers have not increased as many people expected. However, the fact remains that people throughout Briton are sitting on a debt iceberg with many billions of pounds of debt difficulties lying currently unseen beneath apparently calm waters.

How big is the debt iceberg?

According to Bank of England data, the total personal debt in Briton is £1.450 trillion. Worryingly it seems that this is set to increase.

ING Direct research suggests that many people are using £100 a month from their savings simply to enable them to make ends meet. Others without savings are simply getting deeper into debt. Bright Grey, the insurer, has found that 8% of people say that their monthly spending continues to be higher than their income.

The impact of the recession in 2008-2009 has left many families with a reduced income. So why haven’t we seen an explosion of debt problems yet?

The primary reason is low interest rates. A Bank of England base rate of 0.5% has pushed down the mortgage costs for hundreds of thousands allowing them to save each month.

These savings have offset reduced incomes and allowed people to keep their heads above water with their other debts.

Financial pressures growing

But the financial pressure on families seems likely to worsen over the coming months.

Many incomes could be forced lower as the effects of the government spending cuts start to be seen. At the same time, the cost of living is increasing with higher fuel prices and the significant increase in VAT due in January 2011.

This situation is going to make it more difficult for people to maintain their debt repayments and will force thousands more people into a position where they can no longer keep up without taking on more borrowings.

But far more worrying is the risk of a rise in interest rates. The current predictions are that rates will not start to increase until the middle of 2011 at the earliest.

When they do, mortgage payments will follow suit which could leave hundreds of thousands of homeowners struggling to pay their mortgages and other types of debt.

Time to take action?

With such a real threat of getting into serious debt problems, it is important that people act now to get in control of their debt situation to avoid a financial disaster in the coming months.

If you feel that you are at risk not being able to pay your debts, the first thing to do is to take control of your spending. Set a budget and stick to it. Draw up a monthly expenditure plan which fits within your income so you are not borrowing more or dipping into your savings safety-net.

Once your spending is under control take this one step further by starting to save.

If you force yourself to save each month you will be better able to cope if your income falls or your living costs suddenly increase.

You will of cause also have savings to fall back on if you need them to cover periods of unemployment or to manage high one-off items of expenditure.

Finally, if you are already struggling to make ends meet each month and you have debts which are becoming unmanageable, get debt advice as early as possible. There are some very sensible debt solutions, including trust deeds, which you can consider to establish control of your debts and stop them getting worse.

Contributed by:

James Falla

BeatMyDebt.com

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