Citizens Advice report warns that many now face a lifetime of debt

24th May 2006

New research by national charity Citizens Advice suggests that many people turning to them for help are sinking deeper into overwhelming debt from which it will take them a lifetime to escape.

A report published by the charity today reveals that CAB debt clients owe an average of £13,153 - almost a third more than they did three years ago, and the equivalent of 17.5 times their total monthly household income. It will take them an average of 77 years to pay off the money they owe at a rate they can afford.

Consumer credit debt problems brought to Citizens Advice Bureaux have doubled over the last eight years, accounting for three-quarters of the 1.25 million new debt cases dealt with by the national network last year.

Deeper in debt - based on an in-depth analysis of survey data involving 567 debt clients from 61 bureaux across England and Wales - confirms that CAB debt clients tend to be considerably worse off than the population at large, with household incomes less than half the national average.

More than two-thirds of those surveyed were entirely or partly dependent on benefit income.

Citizens Advice Chief Executive David Harker said:

"Low income, combined with badly informed and poorly understood financial decisions are at the root of many of our clients' debt problems. For many there is little prospect of their income increasing or their circumstances changing. The reality is that they are condemned to a lifetime of poverty overshadowed by an inescapable burden of unpayable debt.

"They need to be given some hope that they can turn things around, with a solution that offers them a fresh start, lifts them out of the poverty trap, and gives them a chance to build better financial skills for the future."

Citizens Advice is urging the Government to press ahead with plans for a new low cost, out of court insolvency remedy, the Debt Relief Order ^[1], targeted at debtors with low incomes and assets. It says this would offer hope to those too poor to take advantage of other debt remedies such as county court administration orders ^[2], bankruptcy ^[3]and Individual Voluntary Arrangements (IVAs) ^[4].

The charity says getting the new remedy onto the statute books quickly is especially important if major new Government funding being pumped into providing much more free, independent debt advice for those on the lowest incomes is to be effective.

The new findings revealing a deepening debt crisis among those on the lowest incomes come soon after the Government awarded Citizens Advice £33 million to provide more face-to-face debt advice in England and Wales.

The national network of Citizens Advice Bureaux is already the largest single provider of free, independent debt advice in the UK. Last year bureaux dealt with a total of 1.25 million new debt cases and debt problems accounted for almost a quarter of the entire CAB workload.

Cases reported recently by bureaux include:

A Midlands man who lost his job due to ill-health 14 years ago. He and his wife bought their council house under the right-to-buy scheme but were soon in arrears and gave up the property owing £15,000 on their mortgage. Since losing his job he has been managing day-to-day living expenses by borrowing. As well as mortgage debt he has four credit card debts and three loans and currently owes £64,588.
A lone parent with a seven year old son, living in a rural part of the south-east and therefore limited in the amount of work she can take on who was unaware that her husband had been hiding bills and so did not know they were in debt to the tune of £14,500. Her income is too low to be able to make offers of repayment to her non-priority creditors, but she cannot afford the £475 it would cost to go bankrupt.
A live-in carer in East Anglia who had become dependent on long term incapacity benefit of £76.45 a week after her own health deteriorated badly. Her outgoings now significantly exceed her income. She gets some housing benefit and council tax benefit but still has to pay a sizeable part of her rent and council tax bills from her incapacity benefit and is having difficulty paying fuel bills. She is also struggling to pay off credit card debt of £6,412 at a rate of £70 a month.

Deeper in debt is published at the same time as a separate report, Out of the red, highlighting the range and extent of debt advice already being delivered by Citizens Advice Bureaux up and down the country. The two reports will be launched today at an event at the Department of Trade and Industry.

Out of the red covers everything from the training provided to money advisers through financial support from Barclays, through innovative approaches to delivering financial advice in rural areas by video link, to ensuring that people with mental health problems are treated better by creditors and get access to appropriate help with debt problems.

Debt relief order: The government has proposed a new type of bankruptcy aimed at people who have less than £15,000 in debt, less than £300 in assets and less than £50 per month available income after they have met all their essential expenditure. Like bankruptcy, people will be discharged within a year and, with a few exceptions, any remaining debts will be written off. It is intended that the debt relief order will be much cheaper than bankruptcy. People will have to apply for a debt relief order via an intermediary. Intermediaries are likely to include CAB debt advisers. Parliament will need to change the law before people can apply for a debt relief order.
Bankruptcy: is one way of dealing with debts you cannot pay. Bankruptcy proceedings free you from overwhelming debts so you can make a fresh start, subject to some restrictions; and make sure your assets are shared out fairly among your creditors. In England and Wales it costs £475 to go bankrupt. In most cases you will be discharged from bankruptcy within a year and, with a few exceptions, any remaining debts will be written off.
County court administration order: If one or more of your creditors has obtained a court judgment against you, the county court may make an administration order. Administration is a court-based procedure whereby you make regular payments to the court to pay towards what you owe your creditors. Your total debts must not be more than £5,000 and you will need enough regular income to make weekly or monthly repayments. You do not have to pay a fee for an administration order but the court will take a small percentage from the money you pay towards its costs. The government is considering changing the rules for administration orders to increase the debt limit to £15,000 and require debtors to have at least £50 per month available income after essential expenditure.
An Individual Voluntary Arrangement: is a legally binding procedure which allows you to pay off your debts over a number of years. Some of the debt may be written off and you may be able to keep assets like your home. An individual voluntary arrangement begins with a formal proposal to your creditors to pay part or all of your debts. You need to apply to the court and you must be helped by an insolvency practitioner. Any agreement reached with your creditors will be binding on them. Insolvency practitioners charge fees to set up proposals and monitor the voluntary arrangement.

Last updated: February 22, 2007