The Department of Trade & Industry's statement yesterday that individual insolvencies rocketed again in the final quarter of 2007 should not have surprised many people. There has been growing concern that borrowing in the UK has got out of hand - and that many are no longer able to repay their debts.
The number of bankruptcies and individual voluntary arrangements (IVAs) topped 100,000 last year, for the first time. Earlier, the Council of Mortgage Lenders warned that 8,800 homes were repossessed in the second half of the year, a 65 per cent increase on the same period in 2005.
Now there are question marks about the quality of advice that borrowers receive. Some voluntary organisations believe debt advisers are pushing people into IVAs because they earn lucrative fees from them. Some people may even have been mis-sold IVAs.
Lenders are also getting anxious. In the past 10 days, two of the biggest advisers, DebtFreeDirect and Accuma, warned that banks are becoming reluctant to agree to IVAs.
Debt advisers operate in two distinct sectors. Non-profit-making organisations, including the Consumer Credit Counselling Service, Citizen's Advice and National Debtline, provide advice and may even be able to deal with creditors. Then there are companies with licensed insolvency practitioners, most of which specialise in IVAs.
There isn't a proven formula for working out the right debt solution. It depends on all sorts of factors - how much you owe, income, attitudes to borrowing and the creditors you owe.
However, we asked four debt specialists from across the advice sector to help us put together a guide on how different debt solutions work and whom they might suit. The advice below was compiled with the help of Ian Allison, of Brunel Franklin Debt Solutions, Lisa Colclough, of Citizen's Advice, Frances Walker, of the CCCS, Derek Oalkey of Debt Free Direct.
1 SELF HELP
How it works: A surprising number of borrowers may be able to sort out their debt with the help of an adviser such as Citizen's Advice or the CCCS. The CCCS says a fifth of people who come in just need to face up to the size of their debt and how to get to grips with it. It is possible to cut the cost of debt in many ways - switching to cheaper deals on credit cards and loans, for example. Consolidating your debt into one larger loan is another option, though be wary of securing this on your home. Consolidation loans also tend to be repayable over a longer period, so you'll end up paying more interest. Don't neglect spending. Keep a diary of everything you spend and identify opportunities for cutbacks. Look at whether it is possible to save money on bills, by switching to cheaper energy and utility suppliers, for example. Set yourself monthly budgets and check your progress regularly.
Pros: There is no need to involve a third party; the damage to your credit rating will be more short-term; no risk to your home, profession or privacy.
Cons: Repaymentmay take some time. Interest charges keep amassing, and you may face recovery actions. Those with large debts may find themselves barred from the best credit deals.
Who self-help suits: Your plans for full repayment must be achievable over a reasonable time. You must also be self-disciplined. If so, and your debts are manageable - you owe a few thousand pounds and have missed the odd repayment, say - this may be ideal.
2 DEBT MANAGEMENT PLANS
How they work: A debt management company mediates between you and your creditors, to agree an affordable payment plan. Borrowers make one monthly payment to the debt management service. It takes a fee and distributes the remainder among your creditors. Debt management agreements are not legally binding, however, and your creditors can change their minds about the terms of the agreement at a later stage. It is also possible that the size of your debt may increase, if interest continues to build up.
Pros: You no longer have to deal with your creditors; you make the payments that you can afford; your payments are re-assessed periodically so changes in circumstance can be taken into consideration; only one single monthly payment to make.
Cons: Creditors may continue to charge interest; you may be paying off your debt over a much longer period of time than you had hoped for; there is no legally binding agreement, so creditors can still pursue and contact you, or even take further recovery action; your debts have to be repaid in full; there may be a charge for the plan.
Who does a debt management plan suit? These schemes are best suited for people with smaller debts - either in overall terms, or as a percentage of their income. The standard industry charge is up to 25 per cent of your monthly payment. But there are a number of free services available, such as the CCCS. The plans are best avoided if your debts will not be repaid for many years - say more than five or six - and you must be prepared to be self-disciplined.
3 INDIVIDUAL VOLUNTARY ARRANGEMENTS
How they work: An IVA is a legally-binding agreement with your creditors. The contract must be set up by a licensed practitioner and 75 per cent of your creditors - by the value of what you owe - must agree to the IVA.
The lenders agree to accept reduced payments from you for a specific period. Interest charges are frozen and once the final payment is made, typically after five years, the outstanding debt is written off.
Creditors agree to the IVA provider taking a cut of your repayments, but may sign up on the basis that getting something back from a struggling borrower is better than nothing.
Pros: You make a single monthly payment, rather than dealing with multiple creditors; all future interest charges are frozen. You may be able to write off a substantial sum; creditors can take no further action and must overturn previous actions, such as County Court judgments; you will not be required to sell your home, though you may have to release some equity; an IVA is private and confidential, and will not affect your job.
Cons: An IVA sits on your credit file, preventing further borrowing while the plan is in force. Your credit rating may also hit your ability to borrow after the plan comes to an end. If you fail to maintain your agreed payments, you could be made bankrupt.
Who does an IVA suit? IVAs are for borrowers with unsecured debts - not a mortgage - in excess of £15,000, but there is no upper limit. You must be able to show that you cannot afford to keep up with payments on your debts, but you must be able to pay something - typically, at least £200 a month. An IVA should not be recommended to borrowers who could repay their debts in full over a reasonable period, or those who are unlikely to keep up with the new repayments.
How it works: Bankruptcy is the last resort. If you have debts you cannot afford to repay in any way, then you can declare yourself bankrupt.
You must present an application at your local County Court. If the Court agrees you are not in a position to repay your debts, you will be declared bankrupt on the same day.
The court, through the Government's Insolvency Service, will appoint a trustee in bankruptcy who will contact your creditors and undertake all future dealings with them. Your creditors can no longer legally demand payments directly from you.
Pros: The responsibility for paying your debts is taken away; you will normally be bankrupt for just 12 months, before being discharged.
Cons: Your name and address will be published in the local newspaper and the London Gazette; the record of your bankruptcy remains on your credit file for six years, making it difficult to acquire additional credit. It may take much longer for your credit rating to fully recover; you will have to give up your share of any equity in a property. This may mean selling the property; if your car is worth more than £1,000 you may have to trade it in; while you are bankrupt you will be unable to act as a company director or be involved with the management of a limited company. You may also be prevented from other professions, such as the law or accountancy.
Who does bankruptcy suit? If you have little or no disposable income available to make repayments to your creditors, bankruptcy may be the best option. However, this is a last resort, to be avoided if at all possible if your job will be affected, or if it means you would have to give up your home.
Where to turn for free and impartial advice
* Citizen's Advice: www.citizensadvice.org.uk, or see your local bureau; * Consumer Credit Counselling Service: 0800 138 111, www.cccs.co.uk; * National Debtline: 0808 808 4000, www.nationaldebtline.co.uk.