Bridging

KPMG estimates that 130,000 people will declare bankruptcy as a result of overspending during the holidays, increasing mortgage payments, and unmanageable credit card bills. This figure is 20,000 higher than 2007, which saw approximately 110,000 people declare bankruptcy.

The increase in those declaring bankruptcy reflects the decreasing ability to transfer loans from one institution to another; previously, borrowing money and receiving extra credit, even for those who already had credit issues, was relatively easy compared to now. Mark Sands, of KPMG explained that people could turn to consolidated loans, second mortgages, and credit cards for assistance. Now, he explains, these options will not be there for many people, as credit institutions tighten their lending practices. In addition to the credit crisis, people are suffering from increasing mortgage rates, as many fixed-rate mortgages are expiring.

What will happen to these 130,000 people in 2008? They will be forced to either declare bankruptcy or take out an Individual Voluntary Arrangements (IVA’s), through which they repay a portion of their debts and are then allowed to start again with a clean slate.  

“Credit card companies can expect a busy transfer season in January as millions of us wake up to the cost of Christmas before the New Year financial hangover set in,” says Sean Gardner, chief executive of MoneyExpert.

MoneyExpert’s recent survey shows that although 6.6 million Brits will stay with their current credit card, 2.6 million will switch credit card companies in 2008. Furthermore, the study shows those most likely to switch companies are between the ages of 25 and 34. Scotland has the highest percentage of planned transfers, with 15%; London estimates 6% and 7% for the south-east.

For the estimated 7% of all credit card consumers who will switch companies in January, Mr. Gardner advises that the best use of an introductory, interest-free period is to pay off current debt rather than accumulate more. These interest free periods can be found; two of the best deals are with Egg and Virgin Money, offering fifteen months of 0% interest.

Mr. Gardner explains, “It is good to hear people are taking action but worrying that millions will simply add their Christmas debt to their existing debt. Piling debt on debt is simply adding to the spiral of increasing financial trouble. People should be taking action to get their debt under control and the first step towards that is to cut borrowing costs. The next important step is then of course to pay the debt off, but transferring a balance is at least a start.”

In addition to this sage advice, consumers are warned to plan for balance transfer fees when switching credit card companies, as this small percentage can add up to a significant expense for a large debt.

Mortgage problems abound. A study completed by the Bank of England in September, 2007 found that nearly one million home-owning families were struggling to make their mortgage payments, and an additional 1.8 million stated they were struggling ‘at least occasionally.’ The situation for renters (who typically have lower incomes than homeowners) is even gloomier, with about 28% responding that they had trouble paying their debts ‘at least occasionally.’ With September merely the tip of the financial crisis iceberg, circumstances have become worse since the study took place.

Two factors leading to suffering amongst Britons include increasing interest rates for mortgages, which figures show have increased homeowners’ yearly mortgage payments by a total of £3.6 billion in the last year alone, and institutions tightening their lending practices, making receiving credit much more difficult.

Experts warn that this trend could result in an extremely higher rate of declared bankruptcy over the next two years, as well as a downturn in the property market and broader economy. Already, families are outwardly showing their struggle: In order to make their increasing mortgage payments, many report that they have reduced their spending; 10% have been forced to borrow more money or extend their mortgages; and another 10% have taken on a second job or decided to work overtime.

Despite the dramatic figures witnessed in recent studies, Chief economic adviser of The Confederation of British Industry said that the fundamentals of the economy remain sound and hype regarding a full-blown recession is exaggerated.