Will Osborne's plan help or hurt?
It is estimated that in 2009 there were around four million debt enquiries from over-indebted consumers. Following George Osborne’s Spending Review I expect the numbers of consumers seeking help will rise dramatically over the next two years.
Although it’s difficult to be exact, many experts believe the free debt advice industry can only handle around two million new debt enquiries per year.
So where does this leave all the other debtors, especially if the funding to the Citizen’s Advice Bureau or National Debt Line are cut?
I think, much like private education and health insurance, there is a need for fee-charging debt advisers and the service they provide.
Unemployment: a major trigger of debt
Unemployment is one of the main triggers for debt problems. We currently have 500,000 job vacancies in the UK and unemployment is sitting at five times that level. On top of this, another 500,000 jobs will be lost in the public sector and another 500,000 in the private sector.
If no new jobs are created then the jobs to employment ratio will be one job for every seven people. And this figure doesn’t even include the five million people currently on benefits that will be forced back into work.
The key will be to create jobs, fast.
Is it all doom and gloom?
Most people are predicting doom and gloom, but what if the coalition gets it right and does actually create the two million jobs its predicts? What will the pessimists say then? Probably that it got lucky.
But for some people it will be too late. They will be under immense pressure to meet mortgage payments and a failure to do so could lead to their house getting repossessed.
As a result consumer insolvencies (bankruptcy, individual voluntary arrangements and debt relief orders) may well break all records as people lose the battle to manage their debts.
Change the way we live
The problem is morally and socially we have been encouraged to spend now and pay later, and this has to stop.
For many consumers there will be no other option than to cut expenditure. But it’s simple - if you haven’t got it then you shouldn’t spend it.
To solve the excesses of the past there will need to be a lot of belt tightening and some serious thought given to whether we ‘need’ things or if we just ‘want’ them.
The three ‘Cs’
The Spending Review alongside job cuts will put a heavy strain on people’s finances, which will in turn reduce our confidence.
What we need to get the economy going again is the three ‘Cs’:
Cash, credit and confidence. Cash is linked to credit - get more credit flowing in the economy and along comes the cash.
Then when consumers gain confidence in their job status, they will have greater confidence to start spending again. It might not be easy, but it will be worth it in the end.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.