Broke Britain: millions face struggle to stay afloat as financial crisis hits home

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The Independent Online

Debt experts are predicting a record number of personal insolvencies this year as excessive Christmas shopping, rising mortgage payments and soaring food and fuel costs force thousands of people over the financial edge and into bankruptcy.

More than nine million individuals in Britain are now believed to be struggling to pay credit card bills and mortgages, with the average owed by problem debtors hitting 30,000.

In alarming figures to be released tomorrow, the accountancy firm Grant Thornton predicts the total number of personal insolvencies will jump to at least 120,000 this year, almost triple the equivalent figure in 2004, when just under 47,000 people went bankrupt.

Insolvency experts say people have been readily loading large amounts of debt on to credit cards and personal loans, despite the economic slowdown.

High-street shops and online retailers reported higher-than-forecast takings in December, while the new year sales have also been busier than expected. One commentator described the Christmas shopping spree as one last hurrah before a tougher 12 months ahead.

Although the economy is still vibrant and employment plentiful, the supply of cheap and easy credit that has revved the economy for years is being turned off as a result of the sub-prime lending crisis in the United States. Fewer mortgages are being granted to people in Britain with poor credit records. Credit card limits are being lowered and personal loans are becoming harder to obtain.

According to a poll conducted by Uswitch.com in November, 38 per cent of new applicants for credit cards and 19 per cent of applicants for new personal loans were rejected, while 6 per cent have had their credit card limit cut. With food and fuel prices also set to rise in the new year, levels of disposable income are likely to drop, deepening the difficulties of those attempting to repay debts.

Those already in debt will find themselves at the mercy of collection agencies more determined than ever to recoup money for clients. According to one industry journal, the coming crisis means that "debt collection agencies will need to adopt more sophisticated methods in order to deliver value back to their clients".

The latest figures indicate that 23 per cent of people 9.5 million adults were finding their current level of debt "unmanageable". Although the Bank of England cut the base rate of interest last month, an estimated 1.4 million people will still have to pay more for their home loans when their fixed-rate deals come to an end this year, costing an extra 150 to 250 a month.

Tomorrow, Grant Thornton will forecast that 10,000 individuals will hit the financial wall each month in 2008, with 28,000 individuals sliding into insolvency in the first quarter. As many as one third of bankruptcies in the first three months of the year will be caused by "excessive Christmas spending".

Mike Gerrard, the head of Grant Thornton's personal insolvency practice, said: "Sadly, many individuals spend up on credit at Christmas and pay no heed to the financial warning bells. Come January, they find themselves in a situation where previous financial woes are compounded by the bills arriving from the festive season and in these situations insolvency becomes the only way out."

Mike Naylor, a personal finance expert at uSwitch.com, remarked: "People have enjoyed easy access to cheap credit for quite some time, but for some, the party really could be over." He said those with a poor credit record would experience a particularly tough time.

In a survey last month, the Bank of England found that more than one fifth of those whose mortgage deals had come to an end last year struggled to meet higher payments.

Experts predict a rise in Individual Voluntary Agreements (IVAs), a less stringent form of bankruptcy, because banks are once again accepting them after quibbling with their terms last year. Bankruptcies are also expected to be more readily accepted by individuals because they have become so commonplace and so their stigma has fallen.

Malcolm Hurlston, the chairman of the Consumer Credit Counselling Service (CCCS), predicted there would be a small rise in IVAs and a "quite substantial" rise in bankruptcies.

When individuals are declared bankrupt their debts are written off, but they are often credit- blacklisted for years and may have difficulty finding a job.

Debt agencies said they had been busy during December, which is usually a quiet time.

On average, people approaching the CCCS have debts of 30,000. About 45 per cent of that is from personal loans, 40 per cent from credit cards and 5 per cent from store cards and other lending. The organisation estimates that 7 per cent of the adult population is experiencing serious debt problems, which would represent about 3.3 million people in the UK.

"Nearly all of them have lost control," said Mr Hurlston. "Some of them can sort their finances out but some of them need some kind of solution, which might be making voluntary payments; it could be IVAs or it might be bankruptcy."

Steady increases in the cost of living are expected to tighten the screw. In only 12 months, Grant Thornton said the cost of filling up a vehicle with unleaded petrol had increased by 16 per cent, which meant the public was having to find an extra 155 a year to fill up the car.

Mr Gerrard said: "Coupled with rapidly increasing gas and electricity prices, which are forecast to jump by more than 10 per cent early this year, it's easy to see how those already struggling to pay off credit, particularly those servicing mortgages, are caving in to the pressure." He warned: "I believe personal insolvency numbers will move forward at a much faster pace than anticipated."

Howard Archer, the chief UK economist at Global Insight, suggested that in general people would have to be more frugal this year. "Household purchasing power is likely to be dented by higher energy and food prices over the coming months, while many home owners face having to re-fix their mortgages at significantly higher rates.

"Furthermore, increasing concerns about the economic outlook are likely to further encourage consumers to tighten their belts," he said.

The British Bankers' Association urged people to check their finances carefully and to get in touch with lenders as soon as they got into difficulty.

How to keep on top of your cash

Five money-managing tips from the British Bankers' Association

* Keep an eye on your spending check your bank statements;

* Don't ignore the bills where you can, arrange to pay monthly so you can spread the cost;

* Be careful with the credit card if you're tempted to overdo it, leave the card at home;

* Start to save, or save a bit more there are some good offers as banks compete for your cash;

* If you think you are heading for difficult financial times, go and talk to your bank sooner rather than later.

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