After a year which has seen a frightening surge in personal debts, the traditional six-week Christmas spending spree comes at a vulnerable moment for millions of British households.

Rates are rising again and could be higher 12 months from now.

It is too late for big spenders to change their spots but this time the hangover could be painful.

Andrew Redmond is chief executive of Chorley-based Debt Free Direct, a company providing free and impartial advice to people in trouble.

He said: "From December 27, calls pour in when people accept they have a problem."

Debt Free Direct uses computer analysis to devise an individual solution which won't always earn it a fee.

Some advice firms suggest a solution to earn the fattest fee or promote a particular product, like a consolidation loan, which is in their best interest rather than the client's.

Mr Redmond said: "By January, we will have increased staff from 60 to 80. It's always our toughest month of the year."

Latest figures showed British households are increasing borrowings by £10.7 billion a month, including £300 million a day borrowed against residential property which can't keep rising in value. At the present rate, British households will run up a trillion (a million million) pounds of debt sometime next year.

At Debt Free Direct, launched in 2001 to tackle the rising tide of debt, Andrew Redmond said: "About 16 per cent of people have personal debts, excluding mortgages, of £10,000 to £40,000.

"Many find it increasingly difficult to make repayments and, if rates keep rising as many expect, there could be a dramatic rise in personal bankruptcies. The number of bankruptcies in the second quarter 2003 is up 14 per cent on the same period last year."

Redmond believes the trigger for trouble is the ratio of household debt to income, exclusive of mortgage.

"When it hovered, for several years, about 90 per cent, people were comfortable. Now it is 120 per cent, and at 130 per cent," says Redmond, "people simply can't cope. Then they may need the insolvency process."

Clients at Debt Free Direct typically owe - excluding mortgages - about £30,000 and fall into two distinct groups.

Unfortunates are in their late 20s/early 30s, with debts which overpower them because of unexpected pregnancy, job loss or illness. Irresponsibles are younger and usually single, who seek help when the latest application for a credit card is rejected.

At that point, they are sunk but often slow to see it.

"Irresponsibles don't want a solution," says Redmond. "Just another loan."

More serious cases may be resolved by an Individual Voluntary Arrangement (IVA), a legal instrument forcing borrowers to make a regular monthly repayments over five years. With monitoring, creditors hope to recoup about 40p in the pound - out of which they pay a fee to Debt Free Direct.

Lesser problems may be tackled though the Consumer Credit Counselling Service (CCCS), a not-for-profit organsation available nationwide and funded by creditors who hope to get their money back over six or seven years.

On average, CCCS clients owe a total £25,000 to ten different creditors. The most difficult cases are put onto a debt management programme agreed with creditors.

At Payplan, which specialises in debt advice and management, which raises fees from creditors rather than borrowers.

Managing director John Fairhurst admits: "Our typical client has £26,000 unsecured debts with seven creditors. Many tried to pay debts with a consolidation loan and got deeper into trouble.

"Two years ago, the average debt was £21,500. That is an indication of how the situation is deteriorating."

Payplan lists key warning signse. They include the taking out of more than one consolidation loan within five years and an overdraft so large individuals are already in the red when their wages go into the bank.

* Debt Free Direct (0800 0836751); Payplan (0800 3893431) has a debt calculator on www.payplan.com; CCCS (0800 1381111).

Friday November 21, 2003