Last updated 13:37, Thursday, 24 April 2008

The number of people unable to keep up with their debts could double during 2008 as the credit crunch hits, a report warned this week.

It doesn’t add up: Credit card debt, curbs on lending and rising prices all round are beginning to take their toll

The issue will bite hardest when those affected come to refinance their debts, but find banks and building societies reluctant to lend cash as readily as in the past.

That could force some into setting up debt management programmes or even considering bankruptcy.

It is thought around one million people are currently struggling with unsecured debt, collectively owing £25 billion, or an average of £25,000 each, according to debt management firm TDX Group.

Around 60 per cent of this money is owed on credit cards, with the remaining 40 per cent borrowed through other means, mainly personal loans.

The group warns that with so many people already struggling to manage their debt, the current economic conditions, such as falling house prices and rising living costs, will lead to an increasing number of people finding themselves in financial difficulties.

But the impact of the credit crunch is likely to have a “substantial impact” on the solutions available to those who are struggling, it said.

In 2007, 58 per cent of people who were unable to keep up with their debts refinanced them or remortgaged in order to make their repayments more manageable.

But as banks and building societies tighten their lending criteria, many people will find themselves unable to refinance their debts, instead forcing them to consider taking out debt management plans or Individual Voluntary Arrangements (IVAs).

The group estimates that the number of people taking out debt management plans and IVAs, under which interest on debt is frozen in exchange for a set amount being repaid each month, could double during the year from 400,000 in 2007 to 800,000 in 2008.

TDX Group urged people who find themselves in this situation to shop around to find the best solution for them.

It said 90 per cent of people who took out a debt solution did so with the first organisation they contacted, despite fees from IVA companies varying from £5,000 to £9,000.

At the same time, 45 per cent of people fail to complete their IVA, which typically runs for five years, with 15 per cent dropping out during the first 12 months.

Mark Onyett, chief executive of TDX Group, said: “These issues need to be addressed urgently as we expect strong growth for the debt management market during 2008.

“Thankfully, a number of initiatives such as the Straightforward Consumer IVA (SCIVA), which will improve standardisation and efficiency in the market and the Simple IVA (SIVA), which is likely to be introduced towards the end of this year promising a simpler, lower-cost environment for insolvency practitioners, will make a huge difference in terms of the quality of service provided.”

The number of people declared insolvent is expected to hit a new high in 2008, despite Government figures showing the first fall for nine years during 2007. A total of 106,645 people were declared bankrupt or took out an IVA during the year, 0.6 per cent less than in 2006, but still the second highest figure on record. But experts described the figures as the lull before the storm, with most expecting the number of people unable to keep up with their debts to begin climbing again this year.