EDITOR’S BLOG: The debt trap’s steely jaws
Look at any personal finance website these days and amidst the usual stuff about pet insurance, stock market blips and savings accounts you will see a lot of news about debt.
And debt is big news, believe me. The number of people who were declared insolvent last year soared to 107,000, a 59% increase on the year before, when 67,500 people went bust.
Bankruptcies, where debtors usually lose all their assets including their homes, rose by 34% to 62,900, while many of the remainder of those in deep financial trouble chose an Individual Voluntary Arrangement (IVA) to escape their problems.
An IVA is a deal between you and your creditors, overseen by an insolvency practitioner, with a lot less stigma attached to it than bankruptcy. You pay off some of your debts over an agreed period in exchange for some of them being written off – and you don’t lose your home.
But even an IVA is a messy and undesirable thing to have in your life, so why have so many people got themselves into such a hole? The following conversations were all conducted with actual people but no one wanted to give their real name – which is just one indication of what debt can do to your self-esteem.
Katie, 26, works in the fashion industry in London, although she is from Gloucestershire originally. Sounds glamorous, you may think. But Katie has money problems – big money problems.
“With me it was a combination of easily available credit cards and the excitement of living in London and working in the fashion business,” she says. “For my age I earn pretty good money and soon I was spending freely like a lot of the high-rollers I work with.
“Unfortunately, unlike them, my family are working class and I still owe quite a bit on my student loan, so I was spending money I didn’t have on things I didn’t need and in the company of people who didn’t care, a lethal combination when it came to my solvency.”
Katie has now had the initial warnings from the credit card companies and is belt-tightening in preparation for the long slog in repaying her debts. “I’m cutting back on everything,” she promises. “In a couple of years I want to go home and have a family, and I don’t want to go into that part of my life up to my ears in debt. I will sort this out.”
Katie’s story is perhaps typical of the provincial person seduced by the bright lights of London and getting into debt for that reason. It’s nothing new, as anyone who has read Charles Dickens’ Great Expectations will know.
But there are other categories of debt where the situation is perhaps more urgent for the people involved. Steve and Julie Morris, both in their mid-thirties and with a three-year-old child, own a two-bed flat in Croydon, Surrey – at least for the time being.
“We were brought up to believe that getting your own property was the be-all and end-all of life,” says Julie. “The way it’s worked out for us means that it could well be the end-all, however.”
Steve continues the story. “We saved as hard as we could, but just didn’t get a big enough deposit for the place,” he confesses. “We therefore took out a mortgage that was about five times my income and for a while that was OK.
“But the interest rate rises have crippled us really and, what with the increased council tax this year, we know we are on the verge of being in real trouble. I wish we had never taken out that bloody mortgage now.”
The chairman of the Consumer Credit Counselling Service, Malcolm Hurlston, agrees with Steve. “As the burdens on household finances mount, our research shows that homeowners in particular should take care,” he counsels.
“It is no longer clear that getting a foot on the mortgage ladder is a sensible step,” he adds.
That’s a pretty radical thing to say in the property-obsessed UK. But ask yourself this: would you prefer to rent comfortably or buy unwisely and have the threat of repossession hanging over you like Steve and Julie Morris and their three-year-old child?
The debt trap has very steely jaws and is extremely painful to blunder into. Steer well clear and don’t spend what you don’t have.