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Don't drown in the sea of debt

Britain may be sinking into a sea of debt, a survey from Citizens Advice shows. One person in five has to borrow money just to pay basic household bills, and one in four has faced problems in settling repayments. Last year, the CA branches had a million new enquiries on debt.

Borrowing has never been easier. Banks spray invitations to borrow money or offer loans earmarked for you. Personal borrowing has jumped more than 90 per cent in the past 10 years, though average incomes have risen little more than 50 per cent. The Bank of England said mortgage lending rose by a record pounds 8.4bn in July, pounds 600m more than June's increase.

Endless new credit cards have added fuel. Last year, people bought items worth pounds 102bn on cards, almost two-thirds more than five years ago. Consumer credit rose pounds 3.7bn in the two months to the end of July.

This is a huge splurge on what used to be called the never-never, and is enabling millions of people to spend beyond their means. But what can borrowers do if they find they cannot cope? The best approach is to plan debt in advance of buying anything. But many people accumulate debt from different types of spending, and only gradually realise they are in over their head. For them, the often painful answer is to sit down, add up how much they owe, and compare that with their income.

"They should ignore their first instinct to bury their heads and hope something will turn up," Sue Edwardes, debt specialist at Citizens Advice says. "Borrowers' real starting point should be to work out their monthly income, or the average figure if they're self- employed, and see what they can afford to repay, after allowing for essentials, food, electricity, season ticket to travel to work and so on.

"Move two is to assess which bills are crucial, such the mortgage or rent, electricity, telephone bills and maintenance payments. People usually forget council tax, though you can go to jail if you don't pay it. Other debts, such as bank loans and credit card demands, are less important. If borrowers have enough to make any more payments, the stress should be on making payments on credit with the highest interest, store cards for instance. Then they should work through until they are left with debt at the lowest rate of interest, usually the mortgage."

A survey for the accountancy group KPMG showed more than one in three borrowers has only a rough idea how much interest they are paying on debts, and 45 per cent fail to check bank statements and credit card bills regularly.

Alliance & Leicester, the banking group, has launched a debt consolidation calculator on its website, www.alliance- leicester.co.uk. It shows the interest on credit cards or store cards, and how much debtors could save by consolidating into a single Alliance & Leicester loan. Andy Bayes, the bank's head of personal loans, said: "We fully support the warning from Citizens Advice of the hazards of taking on too much credit. People should do their sums carefully before borrowing."

If the problem is critical, telling lenders there is a problem and why it has happened is vital. They have all had to deal with borrowers in difficulties. Almost all will accept lower payments or just token contributions, particularly if illness, redundancy or marriage breakdown have caused the problem. Indeed, they will often extend any loan or mortgage to cut the monthly bills.

There are other possibilities, such as remortgaging the house to get a lower interest rate. Inevitably, snags can appear, for the original lender may impose a month's or indeed three months' penalty payments, particularly on a fixed-rate loan.

Juggling figures, deciding priorities and working out options are the last things anyone weighed down by debt wants to do. But independent groups, including Citizens Advice, National Debt Line or the Consumer Credit Counselling Service can advise people on just those issues, and their advice is not only free, but objective.

What is more, anyone who mentions they have sought this kind of help will find lenders take them more seriously. So will letters with explanations, figures and detail, setting out the revised payments people think they can afford. No one can argue about what was agreed if typed details are available. Telephoning can lead to endless disputes, and the Consumers' Association says unscrupulous lenders can bully people into putting their particular debt at the top of the repayment queue.

Companies do not have to accept any deal, but there are considerable expenses and delays in taking borrowers to court. They will probably accept any reasonable offer, as long as they believe the borrower is making a genuine effort.

Talk of bankruptcy is usually just moral blackmail. It takes time to enforce and will usually cost lenders more than they will get back by doing it. Alas, some borrowers turn to debt management companies. These offer to consolidate people's debts, and deal with creditors, extending payments over a longer period. But the costs are high. They usually demand a heavy upfront fee, then take a percentage of your monthly payments, typically 15 per cent plus VAT, the Consumers' Association says. Some have delayed payments for customers, making the situation worse.

Other groups offer to refinance loans, lending you enough to pay them off. But that will often mean paying higher interest on the new money than the original lenders were charging. Checking terms and interest rates is crucial, which is why an independent help services should be approached early. They will normally do such calculations for you.

The worst decision is to do nothing. In that case, fringe lenders often threaten to send in bailiffs to take your property if you cannot pay up. But lenders have no right to do so without a court order. So the threat is hollow unless you get an official letter saying they are on their way. The bailiffs do not work for the lenders, but for courts.

Only the Inland Revenue and Customs and Excise can bypass the courts, but like every other creditor they have to give you formal notice that they are coming. "Debt collectors can appear, and will sometimes pretend they are bailiffs," Ms Edwardes says. "But bailiffs do not come round unless you have had that letter announcing they are going to arrive. Debt collectors have no right to enter your house unless you decide to let them in, and they certainly can't take away your goods. That's the law. But some debt collectors try to bully their way in, if pretending to be bailiffs does not work. Report them to the local trading standards officer, or to go to police if there are threats of violence."

The Office of Fair Trading is sufficiently worried about the tactics some debt collectors use to be drawing up a code of conduct, though how effective it will be remains to be seen. Banks and other lenders will not think about court orders and bailiffs if creditors are in touch with them, showing they are taking matters seriously.

Debt levels will be a much bigger worry for the next generation of pensioners, Consumers' Association says. High borrowing levels and with inadequate pension contributions will be disastrous. "In 15 to 20 years, we shall probably see an underclass of retired people racked by debt, with limited pensions savings," Lawrence Baxter, the association's policy adviser, says.

At least those potentially affected have time to take action. Worries over debts people cannot pay here and now can make people ill or provoke a breakdown. Getting independent outside help, sorting out how much debt there is - and how much people can afford to repay - can start to solve the problem. What is more, reading Life After Debt, the Consumers' Association's excellent simple guide to the subject (Penguin pounds 6.99) can help remove terrors that being in debt can produce.