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Sector Analysis

Loss of income becomes number one reason for asking for Debt Management help

By CreditMan Wednesday, June 10, 2009

Leading debt management provider, EuroDebt Financial Services, has published its report of the reasons for clients signing up to a Debt Management Plan (DMP) for the period December 2008 to May 2009. Based on a sample of more than 4,000, the analysis has revealed that loss of income became the main reason for them asking for help. This is the first time this reason has taken the top spot in the EuroDebt table.

For a number of years the main reason for people coming to us for help has been a spiralling of multiple debts, making it impossible for them to keep their head above water, confirmed Kevin Still, Director, EuroDebt. However, what we have seen for the first time in our latest analysis is loss of income or redundancy being the primary reason for clients coming to us. This excludes those clients that are already unemployed, which is categorised separately.

This coincides with more than half of all UK workers having experienced a cut in pay, a reduction in hours or a loss of benefits since the recession began, according to a survey of over 1,600 workers by the Keep Britain Working campaign issued earlier this month.

It also, of course, reflects the huge level of uncertainty that exists about jobs at the moment. Many families and individuals have tried to manage a very fine balancing act paying off debts over the last few years. But the combination of the reduced access to credit, higher credit card interest rates and then a cut to overtime or second income or, worse still, job loss, has meant that the level of debt becomes too much to cope with.

We have found a large number of new clients with reduced disposable income who are now unable to meet all their contractual commitments even at minimum payment levels. We have seen the average unsecured debt level rise to over 29,000 with over 8 creditors. With this level of debt self-management is virtually impossible and a structured debt solution is probably the best route to take.

The EuroDebt analysis, when compared to the previous six months also shows a number of other changing trends in the reasons for families and individuals needing help with their finances.

Previously in the top spot, debt spiral is now the second reason at 21.9%, followed by poor financial management at over 13%. Interestingly, the percentage of clients who have come to EuroDebt for help as a result of Divorce or Separation has dropped slightly in the last six months compared to the previous period from 12.2% to 11.1%. However, worryingly, a reason where there has been quite a marked increase is Illness. For the period June to November 2008 this accounted for just 2.4% of clients coming to EuroDebt, but for December 2008 to May 2009 this has increased to 7.3%.

It could well be the pressures of the economic downturn and worries about existing finances put some people under too much stress, causing a deterioration in their health which, in turns, exacerbates their financial situation, continued Kevin Still.

The fact that debt spiral is still in the top three of reasons also, I believe, demonstrates the impact of enormously restricted lending practices over the last year or so. Revolving credit was certainly the fallback for many families and individuals over the last few years. But with so many lenders pulling back on new credit applications this hasnt been an option more recently.

EuroDebt aims to help consumers take a responsible position with their creditors, especially where they have multiple credit cards and loans, by notifying the unsecured lenders that they have entered a Debt Management Plan (DMP). Generally this means theres no further borrowing and the majority of lenders agree to freeze interest & charges with the result that recovery activities stop. The debt balance will then begin to reduce at a rate based upon the negotiated reduced payments to creditors and the consumer can begin to take control of their finances again.

EuroDebt, unlike any other fee charging Debt Management Company, is the only debt management business that makes home visits a core component of its fact find process, ensuring a complete picture of each individuals situation is gained. This is crucial concludes Kevin Still. At this visit, the debt advisor is able to assess not only priority expenditure, like mortgage or rent, council tax and utilities, but any arrears on these payments. Repayment arrangements to clear arrears are a priority to protect a clients home and family.

There are also instances where critical insurances have been dropped, like life insurance and home insurance, which may need to be re-prioritised. And to help support its clients even further, EuroDebt provides Energy Switching Services, enabling families and individuals to save money on their energy bills in order to accelerate the rate at which they become debt free.

A Debt Management Plan may be for a relatively short period ranging from 12 months to 3 years or a long-term plan that enables them to become debt free, potentially with some equity release for home owners in the future. The flexibility of a Debt Management Plan sometimes allows clients to resume contractual payments where creditors accept EuroDebts proposals of a reasonable offer for a transitional period until the clients circumstances change. For example; find new employment, return to work from long-term illness or maternity leave. EuroDebt also offers Individual Voluntary Arrangements (IVAs) and a Bankruptcy Assistance service, where appropriate and based upon the clients own preferences.