As consumer debt grows, so to does the negative correlation between relative wealth and financial difficulties.

According to a new report, the number of people from low-income households seeking advice for issues of serious debt has more than doubled in less than a year. Households who fall below the poverty line (earning less than 60% of the national average) now represent 33% of all new debt help enquiries. This figure has jumped more than 110% since the last analysis in 2005.

The most likely explanation for the increase is believed to stem from low earning mortgage payers seeking help with excessive unsecured debt. It is also believed that the actual amount of debt being taken on by low earning households is also increasing at an alarming rate. National statistics for 2006/7 suggests that the total accumulated debt for families living below the poverty line averages at around £36’000, more than double the 2005 figure.

Many low-income households have also taken advantage of a strong housing market over recent years, opting to secure loans against increased equity margins. However, as the market begins to slow, so to does the option of releasing equity from properties to cover debt, leaving many with little alternatives

Unfortunately, it would appear that homeowners living below the poverty line are amongst the first to feel the effects of a market in possible decline. And as unsecured debts are taking a back seat in favour of more critical debts such as mortgage repayments, when help is eventually sought it is often to late.

Planning ahead and accounting for the unforeseen is the best and most practical way to avoid financial difficulties suggests the UK’s leading debt society.

Accordingly, preparing for any sudden eventualities and being cautious when it comes to personal finances will put people in a far stronger position if presented with the possibility of debt.

A senior member of the society suggests that changes in our financial climate cannot be squarely blamed for the dramatic increase in the number of personal insolvencies. One of the biggest problems among UK consumers is the inability to forward plan for future problems.

Too many people take too much for granted when it comes to their finances. An example of which could be a reliance on overtime as a guaranteed source of additional income. If additional hours dry up and the person hasn’t made allowances for such eventualities, then it is entirely possible they could land in a sticky situation, which could quite easily have been avoided.

With a slight change in attitude, it is possible that many people could avoid serious financial difficulties. Accumulated consumer debt has well surpassed the £1.5 trillion mark and is growing at a rate of £1 million every four minutes. The number of new IVA cases for Q1 2007 has reached records highs of more than 30 thousand and is expected to exceed that figure for Q2 2007.

If you have children and are in debt, have you ever considered the possibility that if you pass away your burden could become theirs?

According to new studies, the prospect of taking on debt responsibilities from parents is one of the biggest fears among young people today. More than 65% of young people have considered the possibility of inheriting their parents financial burdens and over 80% of people in their mid thirties are fearful about the contents of their parents wills.

These 20th century fears are a direct reflection of our nations growing debt problem. Younger people are uncertain as to how their parent’s negative finances are likely to affect them in the future. The cost of living has skyrocketed, care homes are more expensive and debt among senior citizens is rife.

For previous generations, family inheritance was often relied upon to clear outstanding home loans and make a mends financially. However, today’s generation are fearful that inheritance could also bring the possibility of debt. Recent articles have suggested that over 6 million adults in the UK wouldn’t think twice if their debts reached the £15,000 mark, and over a million people are likely to carry debts surpassing the £40,000 mark.

A new study conducted by a leading home insurer has discovered that almost half of all UK households rely on both occupants to be in employment, in order to maintain a reasonable standard of living. The study has also revealed that 1 out of every 2 households with children; is reliant on 2 wages in order to function.

In essence the report suggests that half of all people would seriously struggle financially if one partner were unable to work. It is thought that a greater reliance on credit has forced a change in trend.

Statistically half of all UK residents have a mortgage, 2/3rd’s have a loan or other bank credit commitments and just under 2/3rd’s have credit card debts. Debt levels are further increased for couples that have children, equating to almost £20,000 pounds more than households that do not.

Credit has been extremely attractive to consumers over the last few years, interest rates have remained relatively low and job security has been at an all time high. However, the biggest problem for consumers concerning credit lies in the commitment itself. Typically, credit consumes a large amount of any household’s disposable income, and if for some reason that level of income were to decrease, the commitment becomes much more of a burden.

It has also been discovered that very few people have adequate savings for such eventualities. Over ¼ of all people have no savings at all, with a further ¼ having less than £5,000 pounds. In the event of financial hardships, approximately ½ of all people would not be able to cope for longer than 4 months.

Recent data relating to the insolvency market in the UK has been branded “disappointing” by a finance resource site.

However, the site has suggested that consumers should not feel deflated by the new data and should remain optimistic with their debt situation. It suggests that consumers are “overly keen” to jump into an IVA and should consider all alternatives such as debt management or just spending less, at the outset.

The site also feels that consumers are lured into IVA plans, through promotional messages which suggest that an IVA is the best form of escape. It feels that the plan is not always the best option as it costs money to set up, however it also fails to mention that Debt management and even Bankruptcy incur fees at the outset.

A handful of IVA providers have been penalised for falsely promoting the tool early in 2007. As a result, promotional guidelines have tightened and new rules have been introduced to regulate the industry.

There is such a thing as being to “comfy with debt”, but apparently UK debtors don’t believe debt is a problem, until it becomes a problem.

The rising number of new IVA cases could be testament to this newfound attitude towards personal debt. According to new studies, over 6 million people in the UK do not consider debts of £15,000 to be any cause for concern. Even more amazing, is that 5% of people would not consider personal debt to be a problem until levels approached the £50,000 barrier.

However, the stigma associated to Bankruptcy is still a dictating variable for around 20% of the population. According to the survey many people would consider Bankruptcy to be more embarrassing than being arrested for say drug related charges or divorcing their spouse.

The general consensus suggests that serious debt is still a big “no, no” among the UK’s population, but the understanding as to when debt becomes serious seems to have been blurred.  

It would appear that many people are in need of serious re-education when it comes to their personal finances. A separate study has discovered that a large percentage of people do not fully understand the functionality of APR associated to personal loans, and are shocked when they learn that the scale and longevity of their accumulated debt, is far more than they realised.

Q1 2007 has seen the largest increase in the number of people declaring insolvency to date, further evidence that the UK’s debt situation has no intention of slowing down anytime soon.

National statistics reveal that a combined total of just over 30 thousand people were either declared Bankrupt or entered into an Individual Voluntary Arrangement (IVA) between the months of January and March. The dividing split is leant more heavily towards Bankruptcy with a suggested 53% of people declaring status; the further 47% have either entered or are in the process of entering into an IVA arrangement.

Faired against Q1 2006 the figures represent a 24% increase for the number of new official insolvencies, it is also the first time that the number of new insolvencies have broken the 30,000 barrier in any given Quarter. Overall the number of new IVA cases is said to be outpacing Bankruptcy status, with annual growth of around 48%.

It is suggested, that the number of new confirmed IVA cases is unlikely to decrease in 2007, and could continue to show growth well into 2008. There is still a phenomenal amount of people who have not faced up to their increasing debt predicament and further economical pressures are likely to bring such people out of the woodwork.

As each new generation comes to the forefront of society, trends, lifestyle and ultimately way of life, inevitably change.

New studies reveal that today’s younger generation are typical of that theory. Modern under 30’s are more inclined to live at home, avoid getting hitched and rack up huge debts than generation’s previous would have ever dreamed. The average amount of time spent living with parents has increased by 2 years, and the search for a spouse is delayed, on average by almost 3 years.

The younger demographic are more willing to accept the burden of debt, and on average look to purchase a home almost 2 years earlier than the generation before them. Over 60 per cent of under 25’s have already bought a home or will do soon, a stark difference from their parents who one average, would not have committed to buying a home until well into their thirties. The Scots have witnessed an ever bigger generation gap, with the average home buyers aged around 26, faired against a previous trend of 34.

So what’s changed?

It is possible that the young people of today have more to deal with financially than the generation before them. House prices are considerably higher than when their parents were a similar age, and continual increases creates a sense a urgency for fear of never being able to buy at all. The debt situation has worsened for numerous reasons and the advent of the 125 per cent mortgage wont help the situation.

However, when all is said and done this alone cannot be to blame. Young people do seem to be far happier to use credit than their parents would have been, and their views on debt are more that of “one of life’s inevitable eventualities” than a means to an end. One thing is for sure though, if the trend does continue then the chances of the UK’s personal debt problem reducing any time soon is unlikely.

One of the best and most practical ways to avoid getting into debt is by learning the skill of “budgeting”. In our cashless, buy it now, pay for it later society spending a little too much from time to time can be an easy mistake to make. However, it is the amount of times that people make the “odd little mistake” which can ultimately result in a serious situation further down the line.

The emphasis on saving seems to bear less importance today, than it did a few decades ago. People are less inclined to wait a while to purchase that “must have product” through saving, and are more inclined to turn to credit. It is this type of change in attitude towards personal finances, which has possibly caused the number of people entering into IVA agreements to rise.

In many cases, the need to result to such measures could and indeed can be avoided with some good old-fashioned budgeting.

Budgeting Tips

Although, a lot of the following list may seem obvious, you’d be amazed at how many people have positively altered their financial position by putting one or more of these tips into practice.

Know your income – According to studies, a large percentage of people spend almost 10% more than they earn each month through credit. An effective way to control debt is by understanding exactly what you can afford to spend each month. It may be a worthwhile exercise to list all of your outgoings and calculate the exact amount left over (your disposable income). By doing this, you will be consciously aware of your financial limits and will be less inclined to over spend.

Open a savings account – If you don’t already have a savings account, it may be a good idea to open one. There are lots of different types of accounts, however a fixed rate account can be rewarding and teach you discipline at the same. Fixed rate accounts usually offer great rates of interest providing you save each month. If you decide to skip a month or withdraw your cash without giving a notice period you are usually penalized in the form of accruing no interest for the month following.

This type of account provides a great incentive to save your cash (high interest), and also teaches you to control your spending (no interest, if you spend).

Always use cash over plastic – Credit cards can be deceiving. Using cash to fund your purchases allows you to physically see what you have spent. Once the cash is gone, then it’s gone. However credit cards remove any restrictions associated to your budget, which can have disastrous consequences.

For many people, the main and most effective way to manage your income is by demonstrating a little self-control from time to time. Understand the difference between “want” and “need” and your half way their.

There are numerous ways to combat debt, however if you consider your debt situation to be serious and you are unable to meet your creditor commitments, there are really only two viable options: -

1. Declare yourself bankrupt.
2. Consider an IVA.

Deciding which option is right for you will depend very much on your personal circumstances and you should always seek professional debt advice before making up your mind. However, for the purposes of comparing one against the other and to provide you with a better understanding as to what each can achieve, we list the unique features of both the IVA and Bankruptcy.

Features of the IVA

• You will have to complete an application form, questionnaire and attend an interview with your IP. In order to protect you from your creditors you will be issued an interim order.
• Your accumulative debts must be greater than £15,000.
• You will be bound to the agreement for 5 years, after which time your debt will be cleared.
• Your possessions will be protected.
• IVA costs are less than that associated to Bankruptcy.
• If it applies, you will not be disqualified as a director of a business, and as such will be able to continue running the business if it is your own.
• An IVA is far more discreet than Bankruptcy, and as such your decision to enter into an agreement will not be made public.
• Your bank accounts will not be affected (although you will be unable to obtain an overdraft facility).
• Your monthly repayment total is based on what you can realistically afford and after the term of agreement is complete, up to 75% of the debt can be written off.

Features of Bankruptcy

• You will be required to complete a questionnaire and attend an interview. You will also be required to disclose the details of your finances to your receiver.
• You can apply for Bankruptcy if the total sum of your debts is greater than £750.
• Your personal assets will be at risk; you may be required to sell your home to repay your debts.
• The actual set-up costs associated to Bankruptcy are usually greater than an IVA.
• You are forbidden from setting up a company without expressed consent from the courts. It is also possible that your job maybe affected.
• Bankruptcy proceedings are publicly announced in local papers as well as the London Gazette.
• Your receiver will work for the benefit of your creditors, and will usually decide which of your assets will be sold in order to pay your outstanding debts.
• Your accounts will be closed and you will be unable to obtain any form of credit.
• After 12 months have surpassed, you will be able to start over.

Conclusion

The option as to which is better, between declaring yourself Bankrupt or entering into an IVA agreement is a decision, which can only be made by you. Bankruptcy should never be taken lightly and should really only ever be considered as a last resort. An IVA allows individuals to avoid bankruptcy, and to also avoid the restrictions, which come with it. On the other hand, if you fail to meet the terms of the IVA you may be made Bankrupt as a consequence.

Although the term of the IVA is 5 times that of Bankruptcy, one of the lessons you will learn on completion, is the ability to discipline yourself when it comes to your finances. One of the best forms of debt control, is learning to self manage your finances in order avoid future debt problems.