IVA & Debt Consolidation Advice

When all of the banks complete their reports and submit their results, all of them are expected to announce a decrease in bad debt provisions. At the same time, the number of consumers who became insolvent increased by nearly 60 per cent in 2006 and is expected to rise another 20 per cent in 2007. At the same time, foreclosures are also increasing rapidly.

It's obvious based on last years' figures that more people are having problems repaying unsecured debt including credit cards, but more people are increasing the amount they borrow. Many people are adding debt to their mortgages instead of overspending on credit cards, and thus, mortgage borrowing rose by 20 per cent in 2006 to more than £360 billion, and forecasters expect that figure to rise even more in 2007. Credit card borrowing, on the other hand, decreased by 2 per cent to £120 billion. However, unsecured loans on credit cards and from banks and other financial sources represent only 17 per cent of the total £1.3 trillion personal debt total.

The rising price of houses continues to bail out many borrowers and their banks, and though foreclosures are high, they are less than a quarter of what they were at their peak in 1991 with the number of borrowers in arrears declining. This is a sign that the UK consumer is looking at more sensible borrowing, that of secured rather than unsecured lending. By refinancing their property, consumers are able to transfer their credit card debt to secured loans that give them not only more time but also lower interest rates as well. This works only if you don't use the opportunity to obtain more unsecured debt or not pay off the debt that you had intended to pay with the secured loan. Of course, if you are in the minority of consumers who don't own a home, the statistics on insolvency are indicative that life may be on its way to becoming more difficult.

Bitter disputes between banks and the debt management companies that have opened their doors in order to help consumers manage their debt is already having an impact. Individual voluntary arrangements where borrowers agree to repay some of their debts in a five year monitored plan have become stagnant as some lenders take a hard line when approving IVAs. Two lenders, Northern Rock and HSBC, reportedly refuse to approve any plan that gives them less than 40 pence for every £1 of the loan balance, substantially higher than the industry standard of 25 pence. MBNA is also said to be taking a harder line, while some lenders are refusing to even consider IVAs at all.

The Insolvency Exchange (TIX) was set up in November to advice lenders about negotiations with insolvency parishioners. TIX sees about 70 per cent of all IVA proposals through its agreement with HBOS and HSBC and finds that fees vary between £1500 and £15,000. It rejects 25 percent of all proposals and asks for modifications to proposals for another 65 per cent. Research conducted by TIX indicates that the majority of people that it sees have annual incomes between £12,000 and £15,000, many of whom have debts more than three times their annual salaries.

Right now some consumers are being kept from bankruptcy by the booming housing market and low unemployment. In spite of recent increases in interest rates, forecasters do not expect repossessions to come anywhere near the levels they were during the last housing downturn. On the other hand, if the economy slows down, banks could be stuck with handling an increase in bad debt. The problem is that even though the economy may be good today, that can change in just a moment by any number of local or world events. Unfortunately that is the reason so many people do get themselves into financial trouble - they have the banks offering them all of this money to spend, and at the time, things are going perfectly. Any catastrophe can change the state of your finances, and you aren't ready for it, you are courting disaster.

Another problem is that most people are only two paychecks from bankruptcy because either they don't have any savings to avoid insolvency, or they have more debt than they could handle in the event of the loss of a job and reduced income. All of these factors work into the formula and can add to the stress factor that you will face without a secondary source of income or way to get out of debt. Perhaps the banks are partly to blame by allowing consumers to obtain too much debt, and in the end, they will be the ones facing the consequences when their bad debt ratio increases because of lenient lending policies.