Even the wealthy can be hit by a debt disaster
What happens when the school fees and BMW repayments can't be met? Neasa MacErlean on the middle-class poor
Saturday 26 November 2011
Telling your friends that you are so poor that you will have to sell the children's horse may not earn you much sympathy. But it is a problem that the free debt advice agencies are seeing for the first time. A new client group is appearing on the doorsteps of these organisations. Some of them may have been earning over £100,000 a year before and some might still be receiving half that but, nevertheless, they have serious debt issues and need help resolving them.
The Consumer Credit Counselling Service (CCCS) has seen such a hike in numbers of this type of client that it has had to train its staff on how to deal with them. The issues are quite different with this kind of person whose main salvation may come in selling assets rather than in starting a part-time job in a supermarket. Data from National Debtline suggests that one in 12 clients earns over £50,000 a year and one in 50 earns over £100,000. The credit rating agency Experian has seen "high income families" (with typical household incomes of £72,000) double their use of overdrafts over the last three years. In 2008, only 15 per cent of this group used overdrafts of £1,000 or more to get them through the month. That proportion is now 33 per cent.
September and October this year saw a "marked increase" in clients from "the impoverished middle class", says the insolvency practitioner Beverley Budsworth of Old Trafford-based The Business Debt Advisor. "They are not suddenly getting into debt," she says. "Their ability to service their debt is fragmented."
At her business (which does charge fees) there has been a reduction in the proportion of new clients who have been made redundant and an increase in those who are business people and whose work flow has suffered.
The retired financial adviser Garry Spencer is also seeing problems among his former client group.
"People always live up to what their earning level is, particularly the professionals," he says. "And they expect their earnings to continue."
He sees the problems widening out now to include fiftysomethings who were getting high salaries in the public sector but who are now being laid off with little hope of getting a similar new job.
While many of these people will be used to dealing with money professionally, they can still be weak in handling their own finances. CCCS has seen more than a few financial advisers with debt problems recently.
Liz Dunstan of the charity Credit Action says: "Debt is no real reflection of income, and intelligence is no reflection of the amount of money management that someone does."
But this group does tend to have some advantages. They tend to be more likely to engage with the problem, says Beverley Budsworth, who adds: "Creditors are pretty pleased when people engage and make reasonable efforts to repay."
The "impoverished middle classes" do tend to have assets that they could sell. Over half of clients seen by Business Debtline have properties, albeit with mortgages on them in most cases. Many of these debtors have second properties, including buy-to-lets. Selling these houses is problematic in the current market, says Roy Gooderson, a buy-to-let landlord of 25 years standing in Whitstable.
"The prices aren't too bad," he says. "But it's a question of selling it. Lenders are making people jump through too many unreasonable hoops even when they are in a good position to buy." He continues: "Anything will sell. It's just a question of what the price is."
For people who have tenants in a buy-to-let there are difficult decisions about giving the tenants notice in order to get a wider buying market. If the property takes months to sell then the owner will miss the lack of rental income in the meantime. On the other hand, if they keep the tenants in the house then the only other people likely to buy are other landlords, a small section of the potential buyers' market.
Some parents will have to consider taking their children out of private schools. "This is becoming more of an issue," says Neil Roskilly, chief executive officer of the Independent Schools Association. It is at its worst now among "single-sex and relatively isolated schools in the North and South-west". But he says that numbers in independent schools overall have fallen by just half of one per cent and that grandparents and schools themselves are finding ways to help out.
Selling horses is problematic emotionally, says Maggie Kirkpatrick of CCCS. "Getting rid of children's animals can be incredibly traumatising." And even selling the reserve car can have a big effect on the owner's lifestyle. "The wife very often runs her life around the second car," adds Kirkpatrick.
The good news for many people in this category is that they often have flexibility in how they resolve their problems. Nicola Connop of Business Debtline advises them to take advice as soon as they have concerns. She says: "The longer clients leave it to seek advice, the more they start to eliminate the options available to them."
Many who get advice early can do deals with their creditors to make regular repayments. These payments can be quite low, if necessary. Creditors will even accept debt reduction at 1 per cent of the debt per month, on a temporary basis, if they are given good reasons.
"Everyone is trying to encourage people to get back on their feet," says Maggie Kirkpatrick. "Creditors are more understanding than they have ever been."
Beverley Budsworth is positive too: "We've got a really good rescue culture."
In the experience of CCCS, these debtors are often very shocked by the situation they find themselves and they need to take a little time to look at the options and face up to them.
"You've got to look at changing the whole of the family's lifestyle," says Maggie Kirkpatrick. "That can take you out of your social group."
So moving house can take people away from friends and out of their social circle. Taking children out of a private school can be easier with young children who have yet to put down roots than with older teenagers.
People who have built up a pension may have other options again. By law a private pension can only be taken, for most people, from age 55. An employer scheme might set the bar at a higher age, but might be willing to make an exception and reach a compromise if given good reasons. Those reasons could include an inability to find work or depression. Since 86 per cent of people with problem debts also show signs of mental health problems, according to CCCS research, many debtors could make the case that they do have depression, excessive anxiety or some other condition.
While they may feel overwhelmed by their problems, these debtors can seriously improve their position if they take advice and start to think clearly. They need to have their own plan in mind. "It's always good to match a problem to a solution before going to creditors," says Bev Budsworth.
And, after people change their lifestyle, they can find they are much more satisfied with their new circumstances than they expected. Maggie Kirkpatrick says: "There's a lot less stress on the family without those continuing worries."
Case studies: When £4,000 a month isn't enough
A medical consultant used to earn £10,000 a month but cutbacks at work meant that this fell to £4,000. Still able to afford the essentials, he and his family were struggling with the mortgage on their large house, the HP repayments on the BMW, school fees and holidays.
When he looked at the options he realised that they were better than he realised. They put their large house on the market with the aim of downsizing and cutting back their interest costs. They felt that they could achieve the lion's share of the economies they had to make by this move alone.
Issues came to a head in Mr X's household when he told his wife that he would have to cancel their £500-per-month medical insurance. He had previously earned a salary of £150,000 a year but had lost his job and was unable to find another. His wife had not realised what that meant in practice until he told her this news.
Mr Y was earning £60,000 a year as an independent financial adviser. But he ran up substantial debts when his clients stopped buying. The scale of his problem was such that bankruptcy was the obvious option. But, since this would have blighted his career, he has persuaded his creditors to accept small token repayments. He is keeping his fingers crossed and hoping that they will be able to start making money again soon.
Where to get help
Consumer Credit Counselling Service:www.cccs.co.ukand 0800 138 1111
Citizens Advice: www.citizensadvice.org.ukand via local advice centres
National Debtline: www.nationaldebtline.co.ukand 0808 808 4000
Business Debtline: http://www.bdl.org.ukand 0800 197 6026
Independent Schools Assocation: www.isaschools.org.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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