Dealing with bad debt

Borrowing money has become too easy

Banks and credit companies have been called to a government summit to thrash out ways to stem a growing tide of unaffordable debts. The BBC's personal finance reporter, Andrew Verity, looks at the issues.

Citizens' advice bureaux are reporting an unprecedented demand for debt counselling.

The number of people seeking advice on unaffordable debts has jumped by 37% in the last two years alone.

Sue Edwards of the Citizens Advice Bureaux says debts are a mounting problem

The advisers have seen examples of borrowers on modest incomes who owe tens of thousands of pounds on up to 20 different credit cards.

Ministers now say that lenders should do more to check that customers can afford further borrowing.

In some cases, debts are getting so out of hand that borrowers become suicidal. Advisers fear that commercial solutions such as "debt consolidation" may not always help.

Falling into debt

Joe, a 66-year-old debtor interviewed by the BBC, began borrowing after losing his job due to ill health.

When his savings ran out, Joe was granted a loan of £1,000 by his local high street bank.

When this ran out he returned to the bank and was granted a further £1,000, a process repeated until his bank manager left the branch.

In July last year he was struggling to repay a number of loans and trust card accounts amounting to about £7,300.

A new manager at his bank branch offered to consolidate his loan, then sold him an insurance policy to indemnify him against any failure to repay the debts in future.

The premium was nearly £2,000.

After signing the papers, Joe was shocked to learn that to repay an outstanding debt of £9,300, he would have to pay £261.17 a month.

His pension income was only slightly more, £356 a month, leaving him just over £95 a month to live off.

Joe considered suicide but was dissuaded by a friend.

In desperation he turned to his citizens advice bureau who pointed out to the bank that it was impossible for Joe to repay the loans and still pay for food and bills.

"The banks knew what I was getting, I wasn't working but they didn't check. No way. I just got the loans there and then. There must be plenty of people like me."

"Getting into debt is the easiest thing in the world. The lenders will encourage you to borrow money, whether or not you can afford it."

Joe's citizens advice bureau persuaded his bank to accept much lower payments of £13 a week. But the bank insisted this could only be a temporary arrangement.

At the time the BBC interviewed him, Joe had just £10 to his name.

Advice for borrowers

Sue Edwards, of the National Association of Citizens Advice Bureaux, says there is concern that some lenders are too aggressive with their marketing.

While some credit card companies advertise interest rates as low as 2.9%, those rates can climb to 17% or more once borrowers start to spend money.

"One of the issues is that people are getting all this junk mail offering cheap credit.

"On the one hand they may be led to believe they must have been given a good credit rating simply because they're receiving this mail.

"And at the other extreme there are many examples of people who do need credit but who are denied it.

"We would like to see an end to the junk mail and if not, then at the very least lenders should be much more restricted in how they advertise."

The government wants voluntary guidelines to prevent the true rates from being buried in the small print.

But debt advisers say regulations are needed to crack down on irresponsible practices by some lenders.

It's all very well to have voluntary guidelines but it's not clear they'll be enough.

With voluntary guidelines, the big lenders tend to sign up - but there are also many smaller credit companies which wouldn't be interested in going along with them.