Financial cracks are emerging on personal finances
Tangible signs of the impact of the cost of living crisis created by rampant inflation on personal finances are starting to appear. The National Institute of Economic and Social Research (NIESR) is predicting that by 2024 that one in five UK households (over five million) will have no savings and a further two million will have no more than two months’ expenditure as savings. NIESR is also forecasting that real terms household disposable income will drop by an unprecedented 2.5% in 2022.
According to the Registry Trust, the total number of county court judgments (CCJs) registered against consumers in England and Wales has increased to 192,022 in Q2 2022. The value of consumer debt covered by these CCJs has risen by 55% in the last year, from £324 million in Q2 2021 to £504 million in Q2 2022. The average value of these debts rose by 52% year-on-year, from £1,726 to £2,627.
The Insolvency Service has announced that there were 28,946 personal insolvencies in Q2 2022, an increase of 6.5% year-on-year compared to Q2 2021.
What next for struggling consumers?
Sadly, much more of the same, with no obvious end in sight. Overall inflation is already at 9.4% and set to peak at somewhere near 12% later in the year according to the Bank of England. The two most pressing elements within the overall inflation numbers are food, where prices were rising at 9.8% in June and household energy where electricity and gas prices were up 95% and 54% respectively from a year earlier. The most recent prediction of the rise in the domestic energy price cap in October suggests it will rise from £1,971 to £3,615, a hike of 83%.
Consumer borrowing is soaring
Individuals borrowed an additional £1.8bn in consumer credit in June 2022, up from a £900m increase in May, according to the latest Bank of England data. Households loaded an extra £1bn on their credit cards, with another £800m on car dealership finance, personal loans and other consumer credit. The annual growth rate for all consumer credit increased to 6.5% in June, the highest rate since May 2019, while credit card borrowing soared by 12.5%, the largest increase since November 2005.
What should consumers struggling with debts do?
There is no magic bullet that will square the circle of soaring living costs and falling disposable income. What is certain though, is that struggling to allocate scarce cash to repay past debts or becoming a forced seller of essential personal assets, particularly your house, is a pressure people should to avoid if at all possible. It is not just the pure financial aspects that need sorting out, but the severe mental and emotional stress of dealing constantly with debts and creditors that must be relieved.
There are a number of ways to deal with the build up of debt, whether it is on a mortgage, consumer loans or credit cards.
Related article: Re-calibrating Individual Voluntary Arrangements in the cost of living crisis
Breathing Space (Debt Respite Scheme)
If you live in England or Wales, you can get temporary protection from your creditors while you get debt advice and make a plan. This scheme is called ‘Breathing Space’. It gives temporary protection for up to 60 days. At the end of it, you will still need to make your debt repayments. But once Breathing Space has been granted, no enforcement action can be taken against you, creditors cannot contact you about debts included in your Breathing Space and creditors cannot add interest or charges to your debt.
Debt Management Plan
A Debt Management Plan is an agreement between you and your creditors to pay all of your debts. This process is usually used when either you can only afford to pay creditors a small amount each month or you have debt problems but will be able to make repayments in a few months’ time. It can be arranged direct with your creditors or through a licensed debt management company for a fee.
Individual Voluntary Arrangement (IVA)
If the cash flow crisis is temporary but larger scale than with a Debt Management Plan scenario, then an IVA could be the answer. This is essentially a deal with creditors where they agree to give the individual debtor time to repay all or an agreed percentage of their debts.
Debt Relief Order (DRO)
The criteria to qualify for a DRO are if you owe less than £30,000, have less than £75 a month spare income, your assets are worth less than £2,000, you do not own a vehicle worth £2,000 or more, you have lived or worked in England and Wales within the last three years and you have not previously applied for a DRO within the last six years.
A DRO releases an individual from having to repay any of their debts, usually after a year, and prevents creditors from taking action to recover debts. It has to be obtained through an authorised debt adviser.
Bankruptcy
You can apply to make yourself bankrupt if you cannot pay your debts and none of the above alternatives are appropriate. The full details of this process and its immediate and longer term implications are complex.
What is the first thing individuals should do about their debt and personal finance problems?
The answer is to take independent expert advice from a professional with experience in the field of managing personal debt problems – and to get it immediately. These situations will not get better without help and without decisive action. Reputable advisers will offer initial consultations free of charge.
As a Group, Opus is here to advise and help individuals facing problems with debt and personal finance. We have extensive experience of identifying and implementing positive solutions in these scenarios. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.