When in debt don’t delay in seeking advice

Jun 20 2009 by Iain Laing, The Journal

Personal debt figures are looking grimmer than ever, with the total number of people going insolvent in Britain now approaching one million. Jim James, North East regional chairman of insolvency trade body R3, warns those struggling with debt to be careful who they turn to for help.

THE latest estimate from the YouGov ‘Debt Tracker’ survey, carried out in consultation with R3, revealed that there are currently 700,000 Britons who are left off the official insolvency statistics, even though they are technically insolvent.

This is because they are in Debt Management Plans (DMPs), which are unofficial but formalised agreements with creditors. The number of these jumped 17% between Aug 2008 and Feb 2009.

The 700,000 DMPs dwarf the combined total of 190,000 people in either an Individual Voluntary Arrangement (IVA) or who were declared bankrupt in 2008.

This survey shows that the official statistics are just the tip of the iceberg of those who are in severe financial difficulty, and it is particularly worrying in light of increased predatory behaviour from unregulated ‘debt solution’ companies, and even criminal loan sharks.

With reports that the National Debtline is receiving twice as many calls as they can deal with per day, it is clear the debt charity sector is overrun, but it is absolutely crucial that people are discerning about whom they seek help from.

I believe the popularity of debt management plans (DMPs) does not necessarily make them the best option for everyone facing financial problems.

A DMP is a structured way for those with manageable levels of debt to sort out their finances, but these plans may not always be the best solution for those in financial difficulty as, unlike statutory procedures, there is no debt forgiveness, no freeze on interest, nor are DMPs binding on either creditor or debtor.

There is also the risk that DMPs can turn into ‘debt slavery’ with the survey revealing that 18% of those in a DMP stated the DMP was due to last longer than 10 years, and another 27% who didn’t even know how long the plan was due to last. The survey also showed that 26% of those in a DMP had the terms of the plan changed, with 64% of these people seeing an increase in monthly repayments.

IVAs and bankruptcy were the only two formal insolvency procedures until this April, when Debt Relief Orders (DROs) were introduced for people with unsecured debts under £15,000 – though no statistics for DROs have been released yet, they are a procedure very specifically aimed at those with a very low income, and little or no assets, and will not make a significant reduction of the number of people in DMPs.

If people are worried about their finances, it’s more important than ever not to delay seeking professional advice, and to make sure they get it from the right people – trusted debt charities and licensed insolvency practitioners are both regulated, and able to give you information on all your options without bias.

Jim James is also head of the insolvency and corporate recovery unit at Newcastle-based law firm Ward Hadaway.