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Debt problems will always be with us

Already the doom-sayers are declaring we will see more personal insolvencies this year.

Overspending during the festive period will force 30,000 people to declare themselves insolvent by April, says accountant Grant Thornton.

The predicted surge in credit problems is no surprise. A cocktail of pre-Christmas rate rises and festive overindulgence was always likely to result in a debt hangover. The fact that such problems exist was predictable and stating the numbers involved achieves little. The critical question is – why is this rise in insolvencies occurring?

To get into difficulty with debt involves spending more money than you have in your pocket and then borrowing more money than you can afford to repay. Either people know this and continue to overspend anyway or they lack the know-ledge of finance required to avoid getting into trouble. I believe that both of these reasons are driving the rise in bad debts.

In some cases, necessity will prompt continued spending even when it is unaffordable. Christmas is a particularly bad time for this with nobody wanting to skimp on presents or a bit of festive cheer. Borrowers in this situation require a compassionate hand in finding a solution.

Other borrowers will continue to spend even with the knowledge that their spending is unsustainable. Such recklessness is fortunately not widespread but the Toad of Toad Hall factor does exist, and arguably the relaxation of the insolvency laws has removed a major brake on this sort of debt problem by lessening public aversion to the consequences of financial mismanagement.

But it is unlikely that overspending through necessity or wilful recklessness is behind the speed of the rise in insolvencies. Poverty and cavalier spending have existed as long as the concept of money itself.

The real problem lies in the lack of understanding of financial matters. The basic skills of budgeting and managing cash seem to be lacking from an increasing section of the population.

The Financial Services Authority is working hard to ensure that firms are as open as possible in setting out the risks associated with borrowing money. In most cases the consumer credit industry is responding well with clear publicity and sound advice. But if customers fail to grasp concepts such as interest, the clearest Key Facts Illustration in the world is unlikely to help.

Government-sponsored campaigns push literacy and now nutrition to the masses. Should there not be a campaign to raise financial awareness? Until we can stop borrowers with 500,000 mortgages phoning up to enquire what the difference is between interest-only and “the other way of repaying”, we have a great deal of work to do.


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