Debt & Bankruptcy Issues in the UK

According to a recent Financial Services Authority (FSA) analysis, there are half a million households in the UK who are serious difficulties paying their bills and managing their debts. Furthermore, there are two million households in the UK that are the verge of financial meltdown and are vulnerable to any future slide in the British economy.

In the largest ever survey of personal finance in the UK, 5,000 people were asked about their circumstances and their financial knowledge. The FSA found that a lack of financial knowledge was an important factor in the near-crisis levels of debt, particularly amongst the 18 to 40 age group. Indeed, the FSA has already earmarked £10 million as part of a campaign to educate the UK public on the importance of sound financial management.

Some of the significant findings were:

• Half a million homes are already having serious financial problems, despite the fact that the economic environment is relatively favourable at this time.

• 70% of people in the UK have no savings to cover their debts should they suffer a sudden drop in income.

• Only 40% of adults have a personal pension although 80% are well-aware that the State pension will not be adequate to cope with their financial needs when they retire.

As part of their campaign to promote a better solid understanding of the fundamentals of balancing income against debt, the FSA are particularly targeting the younger generation. Nearly 4,000 children in secondary schools will be given lessons in money management, and students will be given free access to debt advice.

The FSA hope to target 10 million people in the UK, offering financial and debt advice.

According to a survey by Axa, the insurance giant, some 2 million people in the UK have suffered a loss in libido due to worries over finances.

One in five of those asked said that their financial problems affected their relationship with their partner said that their sex life was suffering too. Of these, the majority were women who made up two thirds of the people who said that debt and other financial worries were ruining their sex life.

Also, nearly 40% of individuals with money problems spent less time with their partner, and half said that they argued more often, and lost their temper more easily. A quarter said that they spent less quality time with their children because of money worries.

As well as relationships being affected by financial problems, an estimated 3.8 million people in the UK have had to take time off work because of health problems directly associated with stress caused by their personal finances. Dubbing the condition “money sickness syndrome”, Axa researchers referred to a state whereby the stress associated with poor understanding and control over personal finances made people either physically, or psychologically ill. Symptoms included headaches or palpitations, mood swings, irritability, and even poor judgement.

Most worry that they can’t make ends meet or make the monthly repayments and bills. Others are concerned that they aren’t saving enough for their retirement. The best advice is for people to take control over their finances and come up with some plan of action. This helps reduce the burden of debt, and at the same time eases the symptoms associated with money sickness syndrome.

Axa say that there are millions of people in the UK who are stressed by debt problems and other financial worries, and that their health and their relationships are suffering because of it. The answer, they say, is for individuals to seek advice and educate themselves, so that they can take better control of their finances.

The Guardian newspaper has been running a quiet campaign against “excessive” overdraft charges by UK banks and lenders.

If a bank account or credit card owner goes overdrawn or makes a late payment, most banks will make a penalty charge, depending on the type of account. This is hitting people with low incomes the hardest, because they don’t have a safety buffer to fall back on if a cheque is late and subsequent outgoing payments means that the account will go overdrawn.

Even if the overdraft period and amount that an account is in the red are very small, the penalty charges can be comparatively severe, leaving some people with debts they cannot afford.

In one example cited by the Guardian, a woman on benefits was charged £64 for two direct debits that meant she became £41 overdrawn. The single mother, on benefits of £98 a week, had previously had a good credit record. The problem was that she received her housing benefit cheque as usual on the 24th of February, and her outgoing payments went out on the 1st of March. Because February is a short month, she went overdrawn through no fault of her own, and suffered a penalty of two thirds of her weekly income.

After writing to her bank, and with the help of Guardian Money, the Leicester woman received a complete refund from the Alliance and Leicester, but there’s a broader issue here.

The £68 penalty imposed by the Alliance and Leicester was for an unauthorised bank overdraft of £41 for a few days. This is equivalent to an annual percentage rate (APR) that the Guardian argues is excessive; possibly even illegal, and could be challenged in the courts.

At the present time, the banks are settling the handful of court cases and avoiding an unfavourable judgement. However, the Guardian newspaper’s campaign against excessive bank overdraft and credit card debt penalties for late payments is slowly gaining momentum.

UK Students are increasingly living with parents to avoid debt problems. A recent survey of 2200 students found that 20% of students were living at home to save rent money, and many had part-time jobs during term time.

Large levels of student debt are the norm since the introduction of government sponsored loans, which have to be paid back after graduation. Whilst one in four students will graduate without owing any debt, most will borrow money either as a student loan, bank overdraft, or credit card debt. The average debt in the UK after graduation is in excess of £12,000 and is expected to increase to £30,000 by the year 2010.

Last year saw nearly 1000 graduates in the UK forced to declare themselves bankrupt.

Clearly, large levels of debt are increasingly a problem for undergraduates, but it’s disappointing that many are living at home and missing out on the chance to enjoy the famous student social life. Two thirds of the undergraduates who did live at home said that they never participated in social activities, and many spent up to four hours a commuting.

Meeting other students and broadening one’s horizons are important aspects of university life, and it’s a shame that huge debt problems are causing so many students are missing out on what many graduates recall as the best years of their lives.

UK store cards charging more than 25% interest will come with a “government wealth warning”, after an investigation by the Competition Commission (CC).

The CC has decided that store card credit lenders are setting annual percentage rates (APRs) that are excessive given their costs, and are overcharging store card borrowers in the UK by at least £55 million a year!

Two years ago, the Office of Fair Trading first asked the CC to look at the issues surrounding store card credit, and practices employed by the 70 different high street retailers offering credit in the UK.

Since then, the average store card APR has fallen significantly to a level of 26.5%. Nonetheless, the CC has determined that that the credit companies are over-charging borrowers by 20-30% above what might be considered as appropriate to cover their lending expenses and return a reasonable profit.

The CC also found significant numbers of store card lenders who were charging an APR of 30%, compared with standard credit card interest rates of 26% or less per annum.

The CC made a preliminary report in September 2005, which described the interest charges on store cards as “inflated” due to a lack of competitive pressure.

Now the CC has told store card lenders they have to:

• Inform borrowers that they may be able to obtain cheaper credit elsewhere, if their APR is higher than 25%.

• Provide more detailed monthly statements.

• Allow consumers to pay by direct debit.

• Separate payment protection insurance from other types of card insurance.

The UK Consumer’s Association Which? welcomed the move to add warnings on monthly credit card statements, but went further advising consumers to avoid store credit cards “at all costs”. They pointed out that cheap-rate credit cards are available with an average APR of 15% - making store cards an expensive way to borrow money.

A pensioner from the North East of England has been told he can pay back a £25,000 debt to Northumberland County Council over the next 83 years in £25 monthly repayments.

The 75 year man will be aged 158 by the time he has finished paying off his debt.

The unfortunate pensioner, who had previously worked for the local authority, was accidentally overpaid by the council – a mistake that was uncovered after a routine audit three years ago.

The council refused to give details of the circumstances that led to the debt in the first place. They also refused to give any details of what will happen if there is any outstanding debt remaining after the man dies. Under UK law, when a person dies their estate can be used to pay off any outstanding debts.

A spokesman for the council said: “We cannot go into the details of the arrangements as it is something which has been made between the individual and the council.”

Whatever the circumstances of the arrangement with the council, we hope the poor man isn’t stressed by the prospect of having a debt looming over him throughout the remainder of his retirement. We sincerely hope the gentleman, or his friends and family, makes sure he gets the best possible debt advice.

The rate of individual borrowing on credit cards, bank loans, and hire purchase agreements fell in January to its lowest level since 1994 as UK consumers attempted to cope with their debt problems.

Figures released today by the Bank of England show that consumer credit lending increased by £ 1.3 billion during January, but annually, UK growth in consumer borrowing fell to a level of 8.7%; a 12-year low.


The bulk of consumer credit consisted of £ 0.7 million borrowed against credit cards, with the remaining £ 0.6 million being made up of loans and other advances.

A £ 9.2 billion increase in mortgage borrowing was observed during January; a two year high that pushed the total net borrowing for mortgages and consumer credit to a healthier looking 10.3% per annum.

Interestingly though, although the amount of mortgage borrowing increased, the number of mortgages awarded did not increase during January. This is the first time that this has happened since November 2004.

It’s worth reminding ourselves that there was a steep increase in the number of individual bankruptcies during 2005, with nearly 70,000 people declared insolvent – the highest number since records began, with a third of these taking out an IVA (Individual Voluntary Arrangement).

With total consumer debt in the UK at £ 1.168 trillion and bankruptcy levels soaring, it’s no great surprise that our appetite for further borrowing is diminishing.

Further Information:

Bank of England website:
http://www.bankofengland.co.uk/statistics/li/current/index.htm