Increased access to financial advice is urgently needed to avert a UK debt crisis, says the Association of Independent Financial Advisors. AIFA is reportedly concerned by the rising debt and falling levels of personal savings in this country, particularly in light of the economic slowdown and increase in the cost of living that is expected this year. They project that a widespread programme of financial advice could reduce debt in the UK by £30 billion. AIFA’s research also indicates that advice that was targeted on low to medium income groups, even it was only followed by 1 in 10 of those who received it, would see a net increase in savings of £1.5 billion in only four years.

Most people learn about debt the hard way – they find themselves in serious financial trouble, then have to learn fast about different debt solutions and how to manage their money. Learning under this kind of pressure can be dangerous – there is always the temptation to go for the quick fix rather than the long term solution. This is precisely how people get in the ‘debt spiral’, trying to borrow their way out long after this ceases to be a viable solution. Clearly, better access to financial education will not only allow people to find better solutions to debt problems, it will can also stop this problem before it starts.

Given the new public awareness of personal debt, there has been an increase in people educating themselves before their debt becomes unmanageable, with a surge in activity on the IVA forum and in enquiries to Insolvency Practitioners since the start of the year. But there has been little in the way of organised, nation wide financial advice, which is long overdue. There needs to be a switch from a culture of borrowing to one of saving. Ironically, this may be a positive result of the recent changes in the mortgage market – 100% mortgage loans are becoming a thing of the past, with many mortgage lenders requiring at least a 25% deposit to have access to the best mortgage products. By forcing people to save, it may also see a change in the way people view taking debt. Rather than borrowing their way to future, they will have to save for one instead.

Many IVA firms, struggling to run a profitable business in an increasingly competitive marketplace, are looking to develop different branches of their business in order to survive. Acceptance rates for IVAs are likely to go up after the agreement between creditors and IVA providers last month, and debt problems around the country will provide IPs with plenty of business this year. But the expected reduction of fees is likely to limit profits and companies are now looking to move into other areas of the debt solutions market in order to turn a profit.

These other branches of business vary from company to company. Debtmatters is in the process of evolving into a secured loans company, having ceased running IVAs and selling on its portfolio to other companies. Debts.co.uk offers Debt Management Plans, bankruptcy advice and secured loans. Fairpoint’s growth is expected to come from its Debt Management Plans, rather than IVA services. Other companies are likely to follow suit.

Aside from keeping these companies afloat, diversifying could bring practical benefits for debtors as well.  It may help reduce any incidences of mis-selling, the current problem being that if a company is only going to make money if a debtor enters into an IVA, it is their financial best interest to direct a debtor to this debt solution. Combining secured loans, Debt Management Plans or specialist remortgages in a single company could allow it to offer genuine advice and make a profit from a variety of services, with less of a conflict of interest.

There’s naturally the question of how well these different services will be provided. Most debt solutions are complex and need to be carefully handled – a wide range of services is of no use to anyone if some of them are sub-par. The conflict of interest problem may still occur if one part of the business is much more profitable than the others. If the company stands to earn much more from a secured loan than from an IVA, it is all too tempting to try and send a debtor in a certain direction. And it is to be hoped that the IVA isn’t forgotten in this scrabble to set up new services and attract new business – it’s not the be all and end all of debt solutions, but the IVA is a practical way out of debt for those who use it wisely.

Homeowners in an IVA may soon face unaffordable remortgages in the final year of their IVA, as the housing market becomes increasingly hostile to borrowers with a poor credit record. It’s a generally acknowledged consequence of IVAs that after the remortgage in the final year, homeowners are likely to be on a more expensive mortgage. But this situation is likely to get much worse in the near future  – there is now significant hostility to sub-prime mortgages, with mortgage lenders increasingly cautious about loaning to those with a questionable credit history.

Unsteady house prices, coupled with the credit crunch, have caused changes across the entire mortgage market. Northern Rock, along with three other large mortgage lenders, have stopped offering mortgages for 125% of the value of the property. Interest rates, especially for sub-prime mortgages, are up. Many mortgage lenders now want at least a 25% deposit for their best mortgage loans – otherwise the rates go up.  If they can secure a mortgage at all, those in the sub-prime sector (and anyone who is in an IVA will inevitably be classed as subprime) will face higher repayment amounts and significantly higher interest on their mortgage loan.

An IVA is supposed to be an end to debt after five years of tight budgeting, especially if the debtor has agreed to forfeit most of the equity in their property. If the debtor is forced into an unaffordable remortgage by the terms of their IVA, then it becomes no solution at all.

Those in an IVA are protected by an important clause in the agreement – any remortgage in the final year of an IVA must be “affordable”, or it should not go ahead. This is something of a double-edged sword – what defines “affordable”? It means nothing concrete, but, if an IP argues the case convincingly, it may mean the remortgage is not required. Whether or not this affects acceptance rates for IVAs remains to be seen – a significant incentive for creditors to approve an IVA has been the promise of an equity release coupled with rising house prices. Remortgaging already causes more anxiety for debtors than almost any other part of the IVA process. With the mortgage market getting increasingly conservative towards subprime borrowers, this is likely to get worse before it gets better.

Debt is part of the way we live our lives in this country. Two common aspirations – to own a house and have a university education – are dependent on incurring a high level of debt. Most people, even if they have no desire to get a degree, would like to own their own home at some point, and there are plenty of people want to both. Student loans and mortgage payments are unavoidable for most, and can be very dangerous – not so much in the debts themselves (which are low interest and low term) but in the attitude to debt that they promote.

Student loans are about the gentlest form of credit possible – interest fixed to the rate of inflation (so the debt is not expanding in ‘real’ terms), and the monthly payments are very low, adjusted to an individual’s income. But it is more about how this affects a person’s way of life, the psychological effect of coming out of university with over £10,000 worth of debt. When you owe this much, what’s another £1000 on the credit card? Or £1500 on a consolidation loan? The debt cycle is all to easy to get into when such a large debt hangs over a persons head before they have even started earning a decent wage.

Any first time buyer who is thinking about getting a mortgage has to be comfortable with a staggering level of debt. Again, the same principal applies – when you owe £100,000 or more to a mortgage company, it is easy to dismiss credit card debts and overdrafts as trivial, a drop in the ocean, even though they can rapidly get out of control. This ‘devaluing of debt’ is at the root of so many people’s troubles.

Whether or not this will change in the next few years, as house prices fluctuate, credit becomes harder to come by and the cost of living grows higher, remains to be seen. University education and housebuying are always going to incur long term debt – the question is, whether or not these can be taken on while still retaining a sensible attitude to other debts.

Mortgage loans which allow homebuyers to borrow 125% of the value of their property were scrapped by four high street lenders yesterday. Alliance and Leicester, Abbey, Coventry Building Society and Godiva Mortgages have all ceased offering these loans, typically formed by combining a 95% value secured mortgage and a 30% unsecured loan on top. It is speculated that the newly nationalised Northern Rock, which sells the majority of this type of loan, will shortly follow suit.

In many ways this decision was inevitable, considering the great changes in the mortgage market over the past few months. These 125% loans were popular with first time buyers, as they allowed people to buy a house without putting down a deposit. But they only make sense for customers and mortgage lenders if they are both comfortable with lending and borrowing very large amounts of money and expect house prices to keep rising. Needless to say, neither of these conditions apply in the wake of the credit crunch.

Northern Rock has been particularly criticised for their mortgage loans, and their haste to ‘bolt on’ the unsecured portion of the lending using charging orders. Indeed, the pressure for them to scrap these kinds of loans stems less from economic concerns and more from ethical ones. People are uncomfortable with a national institution that is effectively encouraging people to borrow recklessly – the nationalisation of Northern Rock may be an embarrassment for the government, but it is almost certainly good news for debtors, as they are likely to have higher standards of care to customers than they did as an independent commercial business.

While in the long term curbing this kind of excessive borrowing is likely to be beneficial to debtors,   those who are already on a 125% mortgage loan may find themselves in difficulty. If they are on a  fixed interest mortgage that is running out soon, when it comes to an end and they are unable to renew it. Some may even face losing their homes – three mortgage lenders are still offering these loans, but there is no telling for how long. The next few months are likely to see plenty of changes in the mortgage and credit markets – debtors are going to have to stay aware in order to keep on top of them.

Baliffs may soon be free to break into people’s homes and forcibly remove debtor’s property, according to government legislation due to come into force in May. The legislation will allow baliffs “to use reasonable force, restraint or violence against debtors thwarting the bailiff’s seizure of their goods”.

Anyone who has missed several payments and been unlucky enough to have their debt passed on to debt collectors has probably run the gauntlet of threatening phone calls that these companies commonly employ. Reports of debtors being harassed on the phone a dozen times a day or being reduced to tears by aggressive threats are alarmingly common on the forum, with professional debt collectors apparently willing so say anything to squeeze a payment out of a debtor.

But this legislation something new, and is deeply concerning. No matter how bad phone calls get, debtors have always been protected by the knowledge that baliffs cannot force an entry into their homes. Many debt collectors make threats on the phone of sending baliffs round – from May, they might be able to back up their claims. The promise that these powers to break and enter are supposed to be “a last resort…in strictly controlled circumstances” will reassure no one. These new powers are in serious danger of being misused, and they are coming in at a very dangerous time. After the credit crunch, banks are increasingly eager to sell on their bad debts, and more and more ordinary consumers are finding themselves in financial trouble. Debt collection is big business – over £6 billion in debts sold on last year.

Aggressive debt collection isn’t just cruel and harrowing for the debtor, it is also almost certain to make a debt problem much worse. Forceful demands for payment scare people into borrow more rather than negotiating a reduction in payments. The threat of forced entry simply make people more fearful, more desperate and less likely to solve their problems in the long run. For all the furore over mis-sold IVAs, it is the less regulated fringes of the debt industry like debt collectors that cause most of the problems. Any good debt solution is reached through careful negotiation and planning – bullying, aggressive debt collection helps no one.

In the UK, it is estimated that two million households are permanently indebted. This means that these households juggle their finances each month to pay off interest and minimum repayments, but will never actually pay off their principal debt. Of course, these two million households provide lucrative income in interest to their creditors – the very real concern is that it is actively in the creditors’ financial interests to hold people in a state of permanent debt, not pushing them into insolvency or helping them to become completely debt free.

Insolvency and ‘bad debt’ aren’t good news for creditors. The figures aren’t in for last year, but in 2006 creditors wrote off a massive £6.6 billion in bad debts. That’s 20% more than in 2005, which in turn was 50% more than in 2004. In light of these figures, it is hardly surprising that banks are looking to curb insolvency. Since the collapse of the US subprime sector last year, creditors around the world have developed a healthy fear of bad debt. For a long time, creditors have been able to ‘have their cake and eat it’, lending large amounts of money out, receiving a healthy amount in interest in return with relatively few people going insolvent. The recent popularity of IVAs and the increasing number of people driven into insolvency are causing problems for creditors.

But the IVA industry is equally unsteady. The exit of Debtmatters from the IVA market has shaken up the industry, and rumours abound that Accuma will be next to sell its portfolio of IVAs. With a massive increase in insolvencies expected and the new IVA protocol promising greater co-operation between creditors and IPs, most thought that this would be a healthy year for the IVA industry. Instead, it is facing a difficult time which looks likely to reshape the way it operates.

The answer to all these problems is, as always, more responsible borrowing from consumers, more responsible lending from creditors, and appropriate access to IVAs for those who need them. Creditors can no longer guarantee that they will make a healthy profit off cheap credit, as more and more debts turn bad and insolvencies rise – perhaps they will lend more carefully, if only to protect their own interests. No one should be forced to live their lives in permanent debt; an IVA is an excellent solution for this situation, but the days of quick profits being made from IVAs is likely to be over. Finally, ordinary consumers must lead the way in not borrowing so recklessly. Creditors, debtors and IPs must adapt to the changing conditions this year, or be left behind.

Debtmatters, one of the larger IVA providers, has announced that it is selling on its book of IVAs and is closing down the IVA branch of its business.  There may be more of this to come – with the IVA industry having grown so much and the market having grown much less profitable in the last six months, it is to be expected that some companies are not going to last. Debtmatters was one of several companies that saw its share prices plummet last year due to problems in the industry.

The impact of the new IVA protocol agreed between IPs and banks is yet to be felt – even if it leads to a higher rate of acceptance, some IPs question whether or not it will remain profitable to run IVAs if fees drop greatly. Many companies will feel that it is best to quit before they suffer more losses.

This situation has been hardest on ordinary debtors who are currently running their IVAs through Debtmatters. Many have reported difficulties in getting through to IPs and case officers, and are justifiably anxious at what the change will mean for them. The last thing anyone in an IVA wants is to be bounced around from company to company, with no guarantee of continued quality of service.     Fortunately, these problems should be brief – all cases are apparently being handed on to reputable companies, and the Debtmatters IVA department is undergoing an orderly shutdown rather than a collapse.

Perhaps this news is made more concerning by the fact that Debtmatters, now operating under the name Loanmakers, is seeking to focus its business on the secured loan market, effectively moving from providing a service to repay creditors to becoming creditors themselves. If, in spite of efforts to improve relations between creditors and IPs, the outlook for IVAs has become so grim that there is more business to be found in the secured loan market, Britain’s debtors may well be in serious trouble in the year ahead. Everyone expects this to be a record year from insolvencies, and there had better be a few companies left standing to run them when debtors are in need.

The director of a leading debt charity has issued a plea for the new owners of Northern Rock to change the ailing banks policy towards debt ridden customers. Malcolm Hurlston, chairman for The Foundation for Credit Counselling, has written to chancellor Alistair Darling, asking him to “take into consideration, when looking at the future ownership of Northern Rock, the need to improve its treatment of people in debt”. Their concerns focus around four areas:

• The practice of attaching unsecured loans to secured mortgages, to the point where the loan in total is up 125% the value of the property
• The single payment for these combined loans, linking secured and unsecured lending
• The frequent refusal of IVA proposals where one of these combined loans is in place
• Its haste to use charging orders to secure loans against a property

Many forum members have watched the downfall of Northern Rock with a kind of glee. There is certainly irony in a creditor that has become infamous for its negative voting towards IVA proposals   itself coming a cropper because of excessive borrowing and a sudden change in circumstance – precisely the conditions that have brought low those who seek to go into an IVA. Others disagree with the negative attitude towards Northern Rock. Melanie Giles has stated on the forum that she has found Northern Rock to be very reasonable towards IVA proposals, so long as they fall within their guidelines for acceptance.

However, the activities of Northern Rock, as raised by the The Foundation for Credit Counselling, are of concern. It is a combination of a willingness to lend up to 125% of the value of a property, their perceived unfriendliness towards IVAs and their habit of securing their loans against a property with a charging order. Individually, these are minor examples of questionable practice, but is when they occur together that problems arise. If the bank gives a large unsecured loan to one of its customers, rejects their IVA proposal and then secures the loan against the debtor’s property with a charging order, then it is blurring the line between secured and unsecured borrowing and leaves the debtor facing bankruptcy.

Of course, there is nothing illegal in the way the Northern Rock operates. They are perfectly free to approve or reject IVA proposals at their own discretion, and the structure of their loans and use of charging orders are equally up to them. But there is something unforgiving about these policies – The Foundation for Credit Counselling was right to flag them up. While these policies may ensure the best recovery of bad debt for Northern Rock and its shareholders, they unfairly penalise the debtor. It is hoped that whoever takes control of Northern Rock, they will look on debtors with a little more sympathy in the future.

Many small business owners are in danger of falling into debt, new research has revealed, and they may be more vulnerable than most to the predicted economic slowdown. A recent study from the Tenon Forum claims that almost a fifth of small business owners have no idea how much their business owes, even though half of them admitted their businesses owe money.

While there can be many causes for debt problems, for small business owners they frequently start when personal and business debts are mixed together. Many ordinary people get into trouble because they cannot manage their accounts or keep track of their debts, and this problem can be made much worse when there are two sets of accounts, especially if the line between them becomes blurred.

When a business is your own personal project, it is inevitable that you will put your own money into running it. Indeed, for many small business owners, personal savings are often a crucial source of start up capital, and credit cards can help to give a business a financial flexibility irrespective of income. But if business and personal expenses are coming out of the same account, and if a single credit card is being used for both weekly shopping and for buying business stock, it can quickly be difficult to separate what your business owes and what you owe, or even if the business is making or losing money. As soon as this confusion has set in, debt can start to pile up.

Any small business owner needs to be very careful to keep their personal and business finances as separate as possible. All income and expenditure should be run out of a separate business account, and if a credit card is being used to help fund the business, it should be a designated credit card that is only used for business transactions. It may also be wise to separate a portion of the business income each month and put it into a savings account, so that when the taxman comes calling in April you are not caught out. Staying in control of personal and business debt (and most importantly, keeping them separate) is vital for a small business owner seeking to avoid insolvency.