UK households are facing a “debt timebomb”, according to Citizens Advice, which compared the “wild west” debt advice industry to the payday loan sector of a decade ago.
The charity said it is helping increasing numbers of people with a negative budget, where their income is not enough to cover the essential expenses, making debt “unavoidable” for millions of people during the cost of living crisis.
According to its latest statistics, 51% of those it helps with debt are in a negative budget, compared with 36% in 2019. The average debt client now has £0 left over each month, compared with more than £15 in 2019.
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“The maths speaks for itself – a household debt crisis is coming and we have a choice about whether to prepare,” said Matthew Upton, the director of policy at Citizens Advice.
“You would hope that what greets them here is a system and set of solutions that will help them get back on their feet, or at worst, not make things actively harder for them,” he said.
“The reality is very different. The most apt description is a wild west – search online for options to pay off debts, and you’ll be bombarded by profit-seeking firms offering misleading advice about debt solutions which won’t help. Fall behind on bills and you could find unregulated bailiffs knocking at the door.”
The use of individual voluntary arrangements – where people make monthly payments for five to six years before their debts are wiped – has soared over the last 20 years to make them the most common debt solution, according to the charity.
However, consumers are being “misled” by firms into agreeing IVAs that they can’t afford, Upton said.
According to Citizens Advice research, 73% of people who are, or have been, in an IVA struggled to make repayments, and 46% had to cut back on everyday essentials such as food and heating to make their payments.
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The statistics also showed 39% said their IVA has had a negative impact on their debt levels and 32% said they had to borrow money to make their payments.
“When they inevitably fail to make their monthly payments, the individual is back at square one, while the firm has often pocketed thousands in front-loaded fees,” Upton said.
“Why is this happening? There are parallels here with the growth of the payday loan industry 10 years ago – a lot of money to be made, and lax or absent regulation.”
