Recently Sean wrote me from the UK and said:
“I’m worried that there is no light at the end of the tunnel for me. I’m working hard, paying bills but can’t reduce my debt at all. Just last month I used money from my overdraft facility to get us through the month.”
Debt experts all across the UK are scratching their heads wondering where the desperate consumers are and what are they doing to address their growing financial problems.
With pressures on all sides increasing against the bank accounts of UK consumers the prudent advice of ‘Be Careful’ is sure to fall on deaf ears. Growing concerns about inflation, loss of jobs and rising basic costs can only result in a few possible outcomes.
1. People will tread water and not make any gains or losses from their financial condition now.
2. Economic conditions will improve for a small amount of individuals due to isolated circumstances.
3. The vast majority of consumers will experience a falling standard of living and and an increase in their level of indebtedness. This pressure will create a ripple effect that will impact the income of businesses through reduced consumer spending.
It’s Happening Now
There has already been a sharp deceleration in consumer spending growth in reaction to falling house prices and financial pressures at home. And for now, inflation, the rise in the cost of stuff we need to buy like petrol and food, is rising at more than twice the government target.
But for the individual person, it seems like the remedy for that situation is to ask for a raise to keep your current salary at pace with the cost of inflation. But businesses can’t afford to do that.
With business confidence slipping and a new survey by Lloyds TSB bank showing almost 66% of business in the UK more pessimistic about the state of the economy than they were three months ago, an increase in salary is not likely.
Wage increases are actually harmful to inflation since all they do is drive the increase is the price of goods and services so a large increase in wages will result in a large increase in prices, and the circle will continue. This is a classic example of what is good for the the individual is not good for the masses.
Prudent advice is to focus on getting your monthly expenses fit within your monthly income and leave room for a bit of savings as well. Anything other than that, increasing personal debt, using credit cards or loans to pay other credit cards or loans or using credit to afford basic living expenses is a massive warning sign that financial trouble most likely looms ahead.
Solutions Available But Is Bankruptcy Best?
Debt advice groups are able to offer solutions like an Individual Voluntary Arrangement (IVA) or Debt Management Plan (DMP) and in fact a UK debt charity recently announced that the majority of consumers are attracted to the Debt Management Plan and about one in fifty opts for an IVA which results in an average of a 58% reduction in debt.
Those solutions certainly sound magical and wonderful but neither of those solutions will be effective if consumers can’t stick to the repayment plan to the end and fully repay their debt as agreed. Each approach has risks and is not perfect.
While the amount of debt reductions with an IVA are outstanding and an IVA is a formal and binding arrangement on the creditor to resolve the debt, it is only successful if the debtor makes all of the payments promised under the IVA agreement. If any unforeseen circumstances arise and prevent the debtor from making more payments in year three out of a five year repayment plan, that could spell the end of the IVA and the debtor would have to start all over again. However, it is not all doom and gloom. An IVA can help debtors to reduce debt and avoid bankruptcy if they can afford the negotiated and agreed upon payments that the Insolvency Practitioner will present to their creditors.
Believe it or not, an informal Debt Management Plan is even riskier. With a DMP, there is no formal plan that binds creditors, like an IVA, to have to live up to any specific terms during the repayment period of the DMP. Creditors can bill for interest waived during repayment, can change interest rates at anytime, can change the repayment terms and do as they wish. While some debtors do repay their debt with a Debt Management Plan, the majority of debtors who enter Debt Management Plans most likely never make all the payments necessary to eliminate their debt.They will have made modest or token payments for a long period of time without totally eliminating their debt.
UK bankruptcy rates have remained relatively flat recently, even dropping in recent quarters, with difficult economic times in the UK which is very surprising. When faced with a personal financial situation of slipping wages, rising costs and not enough disposable income to make ends meet each month, bankruptcy is an easy, quick, legal and available way to eliminate consumer debt completely and start over.
An immediate fresh start in the strained finances of a family can result in a quicker return to a more normal life. But even with such a positive outcome, some consumers fail to learn from their mistakes and sink back into debt again.
If a debtor can avoid repeating their financial mistakes, can learn from current financial failures and shed their debt quickly and in a binding way, then the outcome will potentially be much better than entering a Debt Management Plan or an IVA which is not affordable or sustainable.
Source: Myvesta UK
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