Debt & Bankruptcy Issues in the UK

People in the UK need to be provided with more information on what amount they can afford to borrow before applying for loans.

Halifax has raised concerns that often borrowers are unclear on potential loan limits or how much they can afford to repay before meeting with a financial advisor.

In many cases people tend to have unrealistic sums in mind, especially when it comes to house buying.

"People need to know how much they can borrow," a spokesman for the Halifax said.

He added: "Our online calculator will set expectations about what you can borrow. You should then sit down and work it all out with an advisor."

Clearer information would also enable borrowers to seek out the best deals and assess how possible increases in interest rates would impact on their financial welfare and reduce their monthly disposable income.

Personal budget plans 'can help you out of debt'

A detailed personal budget could help many people plan their way out of debt, according to a national charity.

People concerned with rising debt levels could take a step towards regaining control of their spending habits by drawing up a budget plan that provides detailed information on all their financial activities.

A spokesman for National Debtline, a charity that provides free telephone advice to those with money worries, said: "The first stage is to do a personal budget listing your income and all essential outgoings to keep the roof over your head."

The plan should include any essential monthly payments such as mortgage, rent, fuel, council tax, water, phone, housekeeping, and travel, as well as any incomings from wages or benefits.

This information will then allow specialised advisors to assess where cutbacks can be paid or if alternative forms of lending are needed to help reduce overall debt levels.

This March 2006, saving and lending figures suggest that most consumers are now trying to stay clear of unsecured loans and are investing their cash in bank deposits and increasing their mortgage debts at the same time.

British Bankers' Association (BBA) and the Building Societies Association’s (BSA) statistical reports did show that mortgage lending has increased substantially since last March 2005. BSA confirmed that its members advanced about £4.2bn in March 2006, which is a larger amount, compared to £3.5bn that was advanced during the same month last year.

A total of £5.6bn was the approved in new mortgages as of March this year. This is relatively high compared to £4.5bn of March 2005. The BBA confirmed that the amount of £5.4bn is the highest rate of new mortgage loan over the past six months. The month of February also came in higher at £4.7bn as the average recorded mortgage lending of £4.9bn.

These data are supported by the Council of Mortgage Lenders (CML). The organization agreed that there are records that could show the increased level of mortgage loans during March of this year. But despite the high demand for mortgage borrowing, BBA observed that consumers had cut down on unsecured loans, thought to be primarily a good thing.

Unsecured borrowing includes overdrafts and personal loans. As observed in the past six months, these types of loans fell by £100m while credit card loans ride up to an average of about £200m. Non- mortgage loans also decreased to £400m, which is £100m lower than the previous months.

BBA’s statistics director, David Dooks stated the contradicting figures of mortgage loans and net repayments of unsecured loans imply that modern consumers are gaining confidence in the present housing market and cautious in credit card loans, personal loans and overdrafts.

Chief UK economist for Global Insight, Howard Archer suggested that consumers are still aware of the limitations of credit card spending and are now looking for cheaper ways to finance their personal borrowing. He added that the records for high debt levels, increased unemployment rates and increased pensions relatively implied that there is a high need for consumers to reduce their debt levels.

The awareness of consumers to stabilise their finances was confirmed with fresh statistics showing that the increased amount of deposits on savings accounts and a build up of societies this month of March. The BBA stated that personal deposits reached £16bn (1.9%,) up to £856bn. In addition, net payments for saving accounts welled up to £384m compared to only £221m of last year.

The BSA added that the savings statistics for the first quarter of 2006 increased four times compared to last year’s record. This is by far the highest total figure during the first quarter since the year 2001.

According to a report commissioned by One Advice, nearly 2000 people in the UK have unsecured debts in excess of £10,000. About half a million have unsecured debt higher than £20,000.

People in the lower middle-aged bracket (35 to 44-year-olds) were the most likely to have substantial debts that weren’t secured, with some 650,000 individuals in that demographic owing more than five figure sums.

Similarly, for 18 to 24-year-olds there are about 200,000 people in the UK who owe more than £10,000, which is one in every twenty in that age range.

Most of the unsecured debt takes the form of credit card bills, overdrafts and even sums owed to friends and family. In fact slightly less than one million people are thought to owe more than £10,000 due to personal loans, while about 350,000 have accumulated similar debts on credit cards. Over 80,000 had an overdraft of £10,000 or more.

The problem with unsecured loans is that because they are not guaranteed against an asset, they tend to be more expensive and have a higher interest rate than secured loans of the same amount. One Advice said that this left many people in a vicious, debt circle; struggling to pay off the interest alone, and unable to pay off the capital on the loan.

During 2005, some 70,000 people were declared insolvent, due to bad debts, most of whom went on to be declared bankrupt.

It should be pointed out, that there is in the UK an alternative to the stigma of bankruptcy, known as an individual voluntary arrangement or IVA, where people can negotiate a reduced payment with their creditors leaving them debt-free after a period typically lasting five years. Debt consolidation is also an option for some people, and individuals should seek professional debt advice.

For anyone struggling to repay their debts and are looking for advice online, have a look at the Debtsolver FAQ for details of the differences between debt consolidation, bankruptcy and an IVA agreement.

Fees for transactions on international credit card payments are unfairly increasing retail prices by as much as 2.5% according to the EU’s Competition Commission. For the case of annual credit card fees, credit card owners in some parts of the EU are paying up to double that of other member states.

In an interim ruling, the Commission said that the £935 billion credit card industry in Europe lacked competition and must do more to promote convergence in the internal market. If it’s felt that the credit card companies have abused their dominance of the European market, the Commission can levy substantial fines of up to 10% of annual turnover.

Neelie Kroes, the EU Commissioner, said that she was “fed up” with the credit card companies that were taking advantage of their clients. In 2005, European businesses paid 25 billion euros in fees on international transactions who passed the costs on to consumers. In particular, she singled out Visa and Mastercard, whom she accused them of “abusing” the current situation. She pointed out that a retailer in the UK paid MasterCard a fee that was five times on its credit card than its debit card. Ms Kroes warned the industry that the “paradise days” were over for some credit card companies.

Already reeling from the Office of Fair Trading call for UK lenders to halve their late repayment charges, the banks payment body Apacs said that claims of profiteering were unfounded. The credit card lending industry has 10 weeks to reply to the report.

A third of all British parents are helping their adult children, to the detriment of their retirement plans.

A survey found that thanks to high house prices and financial hangovers from university, 63 per cent of individuals aged between 25 and 34 still rely on their family for financial help, while 46 per cent of 36 to 44 year olds still take offers of assistance from family members.

Analysts warn that the extra support could be crippling parent's financial independence, reducing the amount of money available for retirement plans. But ever increasing property values and the introduction of tuition fees, many parents may find it difficult to find a way out of the trap.

"Unfortunately, increasing financial pressures… are unlikely to abate any time soon so empty nesters of the future should take heed and plan ahead," said Gordon Phillips of Insight Investment on April 3rd 2006, which commissioned the survey.

He added that parents could prepare for the future by taking out a debt consolidation loan, to organise their finances.

The Office of Fair Trading (OFT) has decided that penalty charges for missing minimum, monthly credit card payments are "too high".

The OFT began its investigation into credit card charges in 2004. Yesterday it issued a statement that penalty charges for missed credit card repayments in excess of £12 could be considered unfair, except in exceptional circumstances. In the future, if a credit card company tried to apply a penalty charge in excess of £12, it might try to challenge the fee in the courts. The OFT went on to say that UK consumers are paying as much as £300 million in "unlawful" charges, and that 1 in 5 cardholders were hit by a penalty charge last year.

Of the £1.3 trillion pound debt mountain in the UK, only a relatively small proportion of that amount is in the form of credit card debt. However, it’s thought that the ruling could have implications for other lenders, such as banks and building societies, who also apply penalty charges for late or missed mortgage and loan repayments.

It’s been argued that lenders’ penalty fees act as a deterrent effect, encouraging people to be more responsible about their borrowing and managing their debts.

The Association of Payment Clearing Services, which speaks on behalf of the UK credit card companies, argued that the default charges were "fair, transparent and lawful." They argued that it would be better for customers to pay the minimum monthly repayment amount by direct debit. The credit card companies have until the end of May to make a formal response to the OFT announcement.