Millions of homeowners risk losing their homes in the coming economic slowdown, the Financial Services Authority (FSA) warned yesterday. The worsening economic climate, combined with excessive borrowing and spending in the past few years, could leave many first time buyers in severe financial trouble and facing repossession of their homes.

The FSA has highlighted three ‘danger signs’ for mortgages taken out in the past few years:

• If the mortgage loan was taken out for longer than 25 years
• If it was worth more than 90% of the value of the house
• If the amount borrowed is 3.5 times greater than the household income

If a loan was taken out under more than one of these conditions, it may be an indication that the mortgage may be unsustainable under the changing conditions – an estimated 1.04 million mortgages in the last eighteen months were taken out under two of the conditions listed above, with a 150,000 mortgage loans involving all three. Evidently, many first time buyers have overextended themselves in a period of easy credit and rising house prices.  With these two props taken away, many will struggle to meet their financial commitments.

Predicted interest rate cuts are unlikely to do much to help ordinary consumers – interest on mortgage repayments is likely to remain the same, or even increase slightly, as mortgage lenders seek to protect their profitability during the difficult months ahead. Repossession rates are currently still low, so there may be hope the problem will be averted. They are predicted to rise, however, with an expected 123 homes to be repossessed every day this year. It has long been suspected that any troubles in the housing market would come down hard on ordinary consumers, and this information from the FSA joins the host of alarming predictions made about personal debt in the coming year.

Anyone whose mortgage loan has two or more of the ‘danger signs’ listed above should take stock of their finances immediately and make sure that they are on the best possible deal for their mortgage.

IPs and companies that provide IVAs have come under a lot of scrutiny in the past few months, usually focusing on IP fees or the sometimes questionable advertising used by a minority of debt solutions companies. A few of them have been slapped on the wrist for misleading ad campaigns, and we may be seeing the last gasp of this sort of advertising. Amongst the many new industry standards that will be coming in soon is the regulation of advertising, which will hopefully get rid of many dodgy operators.

Most people will have seen and heard the “write of 75% of your debt through a “secret government loophole”, on the internet, day time TV, or through cold calls and junk mail. This kind of advertising is certainly not as bad as the kind of misleading mail campaigns mentioned last week, but it is in the same grey area, where advertising resorts to heavy distortion of the truth in order to sell a product.

While, technically speaking, 25p to the pound is the minimum accepted return for an IVA, very few IVAs are approved on this basis. HSBC and many other creditors have set a minimum hurdle rate of 40p in the pound – after equity release and IP fees are taken into consideration, most IVAs will write off 40 – 60% of a debt. To keep promoting the figure of 75% as though it were guaranteed is highly misleading. And while a relative minority of people in the UK may be aware of the IVA process, it is hardly a “secret government loophole.” Worst of all, this sort of advertising often underplays the seriousness of the IVA process, gloss over the hard five year slog.

The consequences of this sort of advertising are twofold. Firstly, it leaves many debtors ill-prepared for the realities of life in an IVA. Brought in on the promise of a “magic wand” that will wipe out a chunk of their debt, these people will struggle to adjust to five long years of tight budgeting and no credit. Secondly, it markets the IVA as a solution to people with relatively small levels of debt who have no business being in an IVA in the first place. There are rare cases of people entering an IVA and paying their debt back in full with IP fees on top, usually due to heavy selling of the IVA to someone for whom a less drastic solution would be preferable.

IPs and IVA companies often complain, quite rightly, that they are unfairly depicted as “ambulance chasers” who make their money from those who are in debt. There is almost an unspoken accusation that IPs are somehow complicit in the debt problem. This is, of course, absurd, and is rather like saying that lawyers make their living from encouraging crime (they too are sometimes labelled as ambulance chasers.) Both lawyers and IPs are highly regulated professionals providing a valuable legal service. But equally, it is the responsibility of the IP community to make sure that advertising is honest, informative, and targeted at the people who really need it.

Some recent figures from Credit Action show a potentially interesting trend – while the debt juggernaut in the UK isn’t going to be stopping anytime soon, it may be slowing down. Although interest rates on debt have shot up by 17.5% and the amount of debt per person is still increasing, average personal debt rose in the previous month by only £190 – the month before it increased by £250 per person. It’s an isolated statistic, and it wouldn’t do to take too much from these figures, but combined with everything else that is going on at the moment, it makes for interesting speculation.

Of course, January is traditionally a month for belts to be tightened, but you would expect people to still be feeling the after effects of the traditional Christmas overspend. The poor sales showing across many retailers over the Christmas period, while not great news for businesses, is an indication that many people had an unusually frugal Christmas.

Numerous other factors may have also encouraged people to spend more cautiously,  The credit crunch has had the dual effect of both making credit harder to come by and of making people more wary about buying things on credit unnecessarily. Household costs, such as food and energy bills, are set to rise sharply. Most of these changes won’t be felt until the next round of bills comes in, but they may have encouraged people to cut back in advance. Share price jitters are bound to affect consumer confidence, and all the talk of growing personal debt, stalled house prices and a possible recession have all had their effect.

It could still go either way, of course – this could be the calm before a storm of bad debt and insolvency. Despite the caution that some people are starting to show, it may be too late for many consumers who are too far into debt, and the start of the year has seen a surge in people making IVA enquiries to Insolvency Practitioners and on the forum. Then again, this may be another sign of people being cautious about their debt rather than a sign of an imminent crisis. Although there have been numerous pessimistic predictions anticipating record levels of insolvency so far this year, thrifty consumers may yet manage to prove them wrong.

After the misleading letters that were sent out from the IVA Council, yet another company has been chancing its arm with mass mailouts on the insolvency register. This time it is Integrity Debt Solutions, though the pattern is much the same – advising those in an IVA that they still have time to pull out and consider the debt solutions that they themselves offer. By all reports, they aren’t quite as misleading as the IVA Council letters; their claims that the IVA was ‘under investigation’ and that debtors should cease paying into IVAs without telling anyone caused anxious debtors some serious concerns. But it is another troubling example of the misuse of the insolvency register – the register  may exist for many reasons, but giving unscrupulous companies a mailing list to trawl for business isn’t one of them.

To those who are in the know, these companies’ efforts seem childish – poorly written and factually incorrect. UK Bankruptcy (a questionable company with unclear links to the IVA Council) claims on its website that an IVA remains on your credit record for 11 years, and that if you undergo a creditor petitioned bankruptcy you will have to pay them back for 15 years. These are gross distortions of the truth, designed to push readers of the site to a bankruptcy ‘assisted’ by UK Bankruptcy. But for debtors who are scared and do not know who to trust, misleading information and scare tactic letters can do a great deal of harm.

Typically, the tactic used by these companies is to tell a debtor that their IVA is waste of time, and that they should go bankrupt. The company then charges fees to ‘hold the debtors hand’ through bankruptcy, an entirely unnecessary (though profitable) service. As has been posted previously, there is an unhelpful taboo surrounding bankruptcy – in levels of extreme debt, it can be an entirely appropriate solution. But equally unhelpful is the assumption that a debtor is foolish to choose an IVA when bankruptcy is more ‘financially viable’. Many people feel, honourably enough, that they want to do their best to pay back their creditors. They see the IVA as a sensible compromise, a way of paying back a reasonable amount. As long as bankruptcy has been explained as viable option, the choice to do an IVA remains with the debtor. Accusations of mis-selling and the promotion of dubious alternative solutions help no one.

IVA.co.uk has lodged a petition with Downing Street to restrict or control access to the Insolvency Register – to add your signature, please click here.

The true cost of the much talked about energy price rises is only just becoming apparent, with numbers and figures being brought out instead of vague warnings about unaffordable energy prices. nPower were first to announce variable increases in energy prices around the country by up to 27%, and now British Gas and several other energy providers have raised prices by an average of 15%. All these increases have come in with immediate effect.  4 million people are already living in so-called ‘fuel poverty’ – where more than 10% of the household income is spent on utility costs – and this number is expected to rise by another half million in the wake of the rise in prices.

It is the immediate nature of these rises that is particularly troublesome – either they are genuinely sudden and unexpected, or they have been insufficiently advertised. Either way, they are likely to cause problems for anyone struggling with their debts. Even a small increase in the cost of living can tip a household into trouble if finances are already on a knife edge. But with most coverage focusing on the impact that these changes are likely to have, what hasn’t been sufficiently covered is why the energy companies have hiked their prices.

A deeply concerning suggestion put forward by British Energy (which runs eight power stations but doesn’t supply the residential market) is that the leading energy companies may be deliberately colluding in order to drive up profits. British Energy has written an open letter to Ofgem, the regulatory body for the power industry, asking them to investigate the rising profits of the large energy suppliers. The problem is that the larger energy companies own their own power stations and sell this energy to customers. By controlling both production and sale of product, the large power companies have the ability to manipulate price at will.

It may well be that the increased prices are a regrettable but inevitable change, and that the energy companies are perfectly above board. But there needs to be an urgent inquiry into the practices of the large energy companies, to ensure that their pricing schemes are fair and reasonable. Otherwise,  millions of households risk being cheated every month by this sudden spike in prices.

The Government yesterday announced its plans for a new scheme that would allow struggling debtors to have a ‘payment holiday’ on their unsecured debts, in which a court order would freeze payments to creditors for a period of time. These Enforcement Restriction Orders, or EROs, would prevent penalty charges, charging orders, and ordinary repayment demands for up to one year.

There are a number of conditions. The debtor must have a clear reason for their inability to pay – loss of job, sudden illness and divorce being obvious examples. Simple mismangement of debt will not qualify a debtor for an ERO. Debtors will also have to prove that they will be able to afford the repayments at the end of the ERO. Certain debts, such as student loans and mortgage repayments, will be excluded, but there is no limit to the level of debt that can be included in the ERO. A side benefit of the proposal is that it is predicted to hit the Payment Protection Insurance industry hard. PPI has become notorious for being over-priced, mis-sold, and generally being an unnecessary insurance product.

The chief drawback is that interest on debts is not frozen. It is also not yet clear whether or not people will be restricted from taking more credit while under an ERO. People who unwisely enter into these Restriction Orders may suffer from the same fate as debtors who mismanage their consolidation loans, and just end up with more debt at the end of it.

Still, these proposals are to be welcomed. The sudden loss of income due to illness or loss of work is one of the classic ‘tipping points’ that pushes people into the debt spiral and towards insolvency. Rather than borrowing more to service their debts, debtors will have a chance to get their finances in order and address their debt problems sensibly. Debt Management Plans can provide a solution for moderate to low levels of debt, but they are informal and lack the legal protection offered by the EROs. Regulated and legally binding measures targeted at lower levels of debt could reduce the number of people forced into formal insolvency.

The bad news is that the EROs aren’t expected to come in until 2010 – too late for the thousands of debtors who will have slipped into insolvency by then. But it is a positive step that the government is prepared to provide legal protection for those who have fallen into debt through no fault of their own, and who just need a little time to make things right.

January 2008 is already shaping up to be a tough month for debtors. It is traditionally a time that is already difficult for those with money troubles, due to the burden of Christmas spending which has increasingly been put onto credit cards in recent years. This year, the rising cost of food and utilities, combined with increased mortgage repayments are expected to cause even more problems than usual for those whose finances are on the edge. Forecasts from the debt industry have been universally gloomy, with accountancy firms like KPMG and Grant Thornton lining up to deliver the bad news.

After all these predictions in the past fortnight, inquiries to insolvency practitioners have risen by two thirds this month, and here on the IVA.co.uk forums there has been a 50% surge in activity, mostly from new users eager to find out more about the IVA process. Perhaps the predictions about record insolvencies have become something of a self fulfilling prophecy, with people shocked into reviewing their finances by the grim headlines.

But the fact that more people are seeking help is as much a sign of increased awareness as it is of more people in trouble. Some level of debt has become a common and accepted experience for most people in this country. While it is hardly a positive thing to have an indebted society, it does mean that debt is a less a cause of shame and more an everyday problem that can be discussed and dealt with openly. Part of the problem faced by many debtors is a sense of denial, and a reluctance to talk about their difficulties until it is too late.

It is concerning that so many people are already having such trouble with their debts that they feel the need for professional advice. But it may not be bad news – hopefully many of those who have contacted insolvency practitioners or made enquiries online are not yet at the point of no return, and still have time to take control of their finances.  Changing attitudes in this country, helped by the extensive news coverage of debt and the debt industry, are bringing personal debt out of the shadows, and not a moment too soon.

Over the last twelve months, thousands of customers have demanded refunds for charges made by banks for unauthorised overdrafts, missing direct debits and bounced cheques. The banks claim that they are merely covering their costs. The Office of Fair Trading believe that the charges, typically between £25 and £30 each time, bear no relation to the actual administration costs incurred (believed by some to be as little as £2 each time.) Today, the High Court will begin reviewing evidence, heading for a landmark ruling that will potentially see millions of pounds refunded to customers.

While it is unwise to jump to any conclusions, the bank charges looks like a classic example of unscrupulous behaviour from the banks. A few months ago a host of hidden costs were added to credit cards, seemingly for little reason but to generate extra profit. Already there have been reports that overdraft charges have become more confusing and inconsistent since customers started claiming charges back. Depending on which bank you are with, a 14 day unauthorised overdraft of £100 could cost between £25 with HSBC or over £150 with Lloyds TSB. These kinds of tactics seem to happen with concerning frequency.

The bank charges are a particularly distasteful way of making money, as they clearly target those who are already struggling to manage their finances. These are precisely the people who are in most danger of slipping into serious debt and insolvency. The bank should be helping them out of trouble, not penalising them for profit. The British Banking Association, in response to the case, has absurdly stated that without these charges banks may no longer offer free current accounts. This is almost an admission that banks have become dependent on the charges to maintain their profits. There is a blatant conflict of interest if the banks depend on their customers missing payments in order to make their money.

The case may not be won or lost with this decision. Whatever the judges decide, there will inevitably be an appeal. But if the ruling is in favour of the OFT and the consumers they represent, it will be the beginning of the end to this unfair moneymaking behaviour. Banks are certainly entitled to reclaim the costs incurred from bounced cheques and the like, but they have no right to make a profit from it.

The UK is responsible for a third of the debt in Western Europe, and the average UK resident owes three times as much as his European counterpart. The UK is by far the biggest debt offender as Europe.

Startling as it is, this debt discrepancy can be partly explained by the UK’s homeowning culture in an expensive housing market. Whereas in the UK there is tremendous pressure to get on the housing ladder, many European countries have less cultural pressure to buy a house – it is quite common for couples to rent even in old age. The recent assessment that UK personal debt stands at £1.4 trillion is an alarming statistic, but what is frequently glossed over is that £1.2 trillion of this is in the form of secured mortgages, with £223 billion in unsecured debt.

It is this obsession with homeownership that has made many people so vulnerable to the whims of the housing market. Opinions vary, but many commentators believe the UK house market to be overvalued by as much as 30%. While the elimination of overvaluing may have benefits in the long run (pushing fewer debtors to breaking point with mortgage repayments), everyone fears the results of a sudden crash in prices. Homeowners who depend on the value of their house for their financial security will find themselves in real trouble.

UK debt isn’t entirely due to mortgage prices in an overvalued housing market – there are more credit cards in the UK than there are in the whole of Europe. However, these secured and unsecured debts can be closely linked. The expense of mortgage repayments drives many people to fill the gaps with credit cards, and what begins as a hundred pounds each month on household essentials can quickly get out of control.

Most concerning of all is how house prices, personal debt, and the health of the economy have become so intertwined in recent years. One of the uglier truths uncovered in the past few months is that Britain’s economic growth over the past few years has been heavily fueled by consumer spending – this, in turn, has been made possible by easy access to credit. It is the rise of house prices and personal debt that is pushing many to the edge of insolvency, yet the health of the economy depends on the steady growth of both - and ultimately, this situation will become unsustainable.

An interesting side effect to the credit crunch was predicted today, as Terry Balfor of IVA.com speculated that worsening lending conditions would make consolidation loans much more difficult to obtain. For those who are struggling with debt, it is hard to say whether this is a good or bad thing.

Consolidation loans can be a way out of debt before more serious solutions such as a Debt Management Plan, IVA or bankruptcy become necessary. It is, in essence, a loan to pay off your other debts, giving the debtor one payment to focus on rather than many. At its best, a consolidation loan will have a relatively low rate of interest and affordable repayments, giving a debtor a sensible way of taking control of a debt problem early on. It can be particularly useful for curbing credit card debt, which has notoriously high interest rates.

Like most areas of the debt industry, of course, consolidation has a nastier side. The low rate of interest offered by some consolidation loans is achieved by securing the loan against a house. The risks of this are obvious – if repayments on the loan go bad, the house can be taken as collateral, and secured debts cannot be included in an IVA.

Not every consolidation loan offers a preferential rate of interest. There are plenty of shady companies that make their money from so called ‘predatory lending’ – finding desperate debtors, too panicked to read the small print and who have been refused credit elsewhere, and offering them a large loan at an extortionate rate of interest.

The troubles with a consolidation loan isn’t always from the lender’s side. Since there is nothing to stop people from continuing to take credit alongside the consolidation loan, too many debtors find themselves racking up the credit card bills after taking a consolidation loan and just make things much worse. Many regular posters on the IVA.co.uk forum point at an unsuccessful or exploitative consolidation loan as the point when their debt levels went from being serious to unmanageable.

Like any other debt solution, consolidation is something to be researched thoroughly. The worsening lending conditions may well push legitimate operators out of the market and increase the number of unscrupulous lenders, so even more care needs to be taken in the coming year. Above all, if you do take a consolidation loan, cut up your credit cards – and make sure that loan is the last piece of credit you take until the debt is cleared.