Recent figures by R3, the insolvency trade body, found that almost one in two adults are concerned about their high levels of personal debt. As a specialist personal insolvency solicitor, this news does not come as too much of a surprise.
Debt was not such a big concern prior to the credit crunch and recession of a couple of years ago. In that pre-credit crunch era of rising house prices and available credit, consumers were free to carry on spending on their credit cards and unsecured loans and every three or four years consolidate their increased unsecured debt on to their property, by way of a remortgage or secured loan. In those days, this was not such a big problem as house prices were still on the rise and consumers could be confident that if the worst came to worst, they could simply remortgage again or sell their property, releasing equity from their home.
We live in a very different world today. Credit is not freely available, even for people with a good credit history.
I recently heard from a mortgage broker that one of her clients, who had several hundred thousand pounds worth of equity in his domestic property, had still been turned down for a secured loan due to one late payment on a credit card. Despite the fact that there was no other bad credit history, this was enough for the bank to refuse his loan.
How different it was a few years ago when credit was being thrown at home owners and the lenders often did not even bother to check if the stated earnings on applications were correct. This led to the common occurrence of people taking out remortgages and secured loans far in excess of what they would be able to repay. The availability of credit is so limited now that if a borrower has missed one payment on a credit card for example their rating will almost be the same as someone who is bankrupt.
It is no surprise to me then to learn that up to 50% of adults are worried about debt because in reality, the availability of credit is now a problem. Someone who actually needs credit to pay for their living expenses for a short period of time, for example if they are going through a divorce or if they have lost their job etc, is now unable to get the credit. This could easily have a knock on effect of them not being able to make payments to their existing creditors, and a spiral of bad credit and debt can quickly develop. This could ultimately lead to them being faced with bankruptcy or the necessity to set up an Individual Voluntary Arrangement with creditors.
Over the years, Britain has developed the most advanced and far reaching credit facilities of any European country. We have consequently spent more on credit cards than any other European country. In most countries, credit card spending is seen as the exception not the rule – not so in Britain. We are now seeing and experiencing the result. No longer can people remortgage their properties to service these unsecured debts and the chickens have come home to roost with the credit cards bills still needing to be paid.
Even the previous Prime Minister caught the spending bug and in the immediate years prior to the credit crash, launched the biggest post spending boom this country has ever seen, all on borrowed money!
Well, what can we do to get out of this muddle? The government has recently announced its plans for a comprehensive spending review which will make billions of pounds worth of cuts in areas such as welfare benefits, public services and defence spending. In common with the government, the British consumer will have to cut its cloth accordingly. This means living within means and not spending money that cannot be repaid.
Whether this financial tightening will have the effect of helping the economy out of recession is a debate for the economists and the politicians. One thing is for sure – it will be a long time before the government can fund extravagant spending, such as the winter fuel allowance or the Sure Start programme for newborns. It will similarly be a long time before the British consumer can pay for their holiday or Hugo Boss wardrobe by sticking it on their credit card!