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A surge in calls to debt advice charities is fuelling concern that thousands of families will be encouraged to take on more debt as a way through the recession.
The Consumer Credit Counselling Service said it was experiencing record levels of calls since it reopened after the Christmas break from families and older people who were finding a combination of rising fuel bills and unaffordable mortgages was causing them to default on loans.
The charity, which advises tens of thousands of people a year, warned that they could turn to offers of more loans to delay resolving their cash crisis.
Recent figures on credit card lending show a rise in the number of financially distressed consumers. In December the shortfall in consumer credit card repayments jumped to 7% from 5% a year earlier.
Consumers are also expected to consolidate loans as a way to relieve debt distress, despite the clampdown on lending by the mainstream banks. According to Sainsbury's Bank, the first three months of 2009 could see 250,000 debt consolidation loans taken out, with a total value of almost £3bn.
According to Sainsbury's, nearly 25% of personal loans are taken out to consolidate debts. It expects about 18% of this year's personal debt consolidation loans to be taken out in the first month of the year.
Steven Bailey, the bank's head of loans, said most borrowing was for less than £12,000. "We are extremely conservative and careful to make sure any loan we offer is affordable," he said.
According to Michael Land, chairman of the Debt Managers Standards Association, his members have witnessed growing consumer indebtedness over the last three to four years. "It's not a new phenomenon," he said. It is estimated that 350,000 people are repaying their lenders using debt management plans.
Land said many of the largest firms were already working at full capacity.
"In many ways it is the people with smaller debts and no income who are the hardest hit and find it difficult to get good advice - people with £3,000 of credit cards debts who have just lost their job."
The debt management industry is plagued by rivalries, mostly based on the different products they are allowed to sell. Debt management plans are negotiated with lenders and remain flexible, allowing a lender to increase payments when a borrower's circumstances change. Individual voluntary arrangements are for a fixed term and offer the certainty of level payments, though they can cost up to £7,000 in commission charges to implement.
Debt charities argue that many consumers are confused by the arguments put forward by rival firms for the various packages. Critics of IVAs say that the fixed payments pay little regard to a borrower's changing circumstances and have a high drop-out rate.
Many of the arguments between providers are prompted by the significant profits to be made from selling debt-management plans and IVAs. Many companies have operated on 20% margins and attracted buyers from the private equity industry. In 2007, private equity firm Alchemy Partners bought Think Money, a debt-management firm based in Manchester, for £110m. At the time the company was making £5.2m in profits on a turnover of £27m.
The CCCS said demand for debt advice is expected to grow strongly. "December and January are usually quiet," a spokeswoman said. "We don't know why, but we expect people are spending and not looking at their credit card bills yet. This year is different. There hasn't been any let-up."
Debt collectors expect 2009 to be a bumper year after a difficult 2008. Last year most banks were reluctant to sell their bad debts to collectors, according to industry insiders.
But banks have already started to sell debts they can no longer recover, an industry source said, and there will be a sharp rise in the number of debts, if not of people willing or able to pay them.
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