The Office of National Statistics (ONS) released data last week confirming that disposable income is declining for the average adult in the UK and recently fell to its 2003 level. Disposable income is measured as cash available after-tax payments are made. The ONS also measures real actual income per person, adjusted for inflation. This figure is also declining and recently dropped to its 2005 level. As a result, the financial behaviours of the average consumer are changing.
Consumers are now spending less and attempting to repay as much debt as they can. However, reduced disposable income means they cannot save as much money as in the past. In addition, consumers with large debts are not able to reduce their expenses as substantially as individuals without debt are. Loan repayments do not change based on income. In the past, these consumers might have used debt consolidation to reduce their monthly expenses but this type of lending is currently difficult to find.
People in debt have fewer avenues for relief when declining disposable income makes it difficult for them to afford repayments. Many are turning to debt management plans to reduce their burden. Though consumers are having a more difficult time obtaining credit, providers of debt management plans are quite busy. When an individual pursues this debt relief program, disposable income becomes an important figure.
Debt advisers review consumer income and expenses. They create a budget that includes regular expenses like food and council tax. The excess of income to expenses is the amount that may be used to repay creditors included in debt management plans. Providers of these plans are encountering situations that confirm the ONS statistics. Many of their new clients have lower disposable incomes than those who created plans several years ago. In addition, some existing clients are being forced to reduce their plan repayments due to declining disposable income.
With this plan, the debtor is responsible for the full repayment of debts. Therefore, disposable income must be high enough to do so within a reasonable timeframe. If debts are high and the proposed monthly payment is low, the repayment term may be unacceptably long. Consumers should ask a plan provider to estimate their repayment term so they can decide whether this is feasible for them. Creditors may not be as willing to accept a plan with a longer repayment term so they should also be considered.
The repayment amount calculated for a debt management plan should leave the debtor enough money for living expenses. At the same time, it should show creditors that the debtor is making his or her best effort to repay the amount of debt that can be afforded. Achieving this balance allows each party to benefit.
The Consumer Credit Counselling Service (CCCS) provides figures that are used to develop guidelines regarding reasonable levels of expenditure under debt management plans. Plan providers use these guidelines to develop manageable budgets for their clients. Creditors refer to the guidelines to determine whether repayment proposals are fair. A committee regularly reviews the CCCS figures and adjusts them as necessary.