Factsheet: Debt

May 2006

People get into debt for many different reasons. Sometimes the debt has been caused by a particular event, such as the birth of a child or loss of a job, which has led a family to earn less and spend more. Whatever the cause of your indebtedness, this factsheet covers the steps you can take to deal with it. It is important to seek further advice if any of your creditors take you to court, if they will not accept your proposals or if you need help working out what to offer creditors. It is also very important not to ignore the problem - delay in dealing with your debts is likely to make things worse.

1. List your debts

The first step in dealing with debt is to work out who is owed what. You should make a list of all your debts (including those where payment is not being demanded). You may need to contact your creditors to do this. You should consider whether you are responsible for all the debts. For example, a spouse/partner is not generally liable for his/her spouse/partner’s debts just because of the relationship. There is only responsibility (in most cases) if both parties signed the contract. You may need to take advice on whether you are responsible for all the debts.

2. Work out your income

You will need to work out what your income is and make sure it is as high as possible. Are you claiming all the benefits and tax credits to which you are entitled? You might find our factsheet on Tax Credits and Benefits helpful. Is there any other money you might be entitled to, such as a redundancy payment if you have recently lost your job? Do you have payment protection insurance to cover any of the debts? You may need to obtain advice to check if you are claiming everything you are entitled to. Also make a note of any savings you may have and consider if you have any other capital, such as equity in your home. Can these be used to pay your debts?

3. Make a list of your outgoings

The next step is to make a list of how much you spend regularly, for example how much you spend on housekeeping, rent, clothing and so on. Be realistic about what you need, and make sure you work out all figures consistently (either weekly or monthly). You may want to keep a diary of your expenditure to help you work out what you spend. Take your outgoings away from your income to work out how much money you have left over to pay your creditors.

4. Options for what to do next:

A. Borrowing to repay debts

Re-mortgaging or taking out a loan to pay your debts can be a solution, depending on your circumstances, on the terms of the loan including the interest rate to be charged, and on whether the loan will be secured. It is important to seek advice before re-mortgaging or taking out a secured loan to make sure that you are doing the right thing. Sometimes re-financing your debts can make matters worse and if you fail to meet the payments you could lose your home.

B. Bankruptcy

It is possible in certain circumstances for you to apply to the court to be made bankrupt, as well as for your creditors to do so. Once the bankruptcy is discharged, you will not be liable for most of the debts you incurred. However, bankruptcy does have serious consequences (for example, officials will examine your financial affairs closely, you could lose your assets including your home and it will be extremely difficult for you to obtain credit in the future)- it is essential to take advice.

C. Individual voluntary arrangements (IVA)

An IVA is a court-approved arrangement with your creditors, which prevents your creditors from taking further action against you whilst you repay your debts. An Insolvency Practitioner makes the arrangements. The costs of paying the Insolvency Practitioner are often substantial but are often included in any repayments that you can afford to make.

D. Negotiate with creditors

PRIORITY DEBTS

a. Decide which are your priority debts

You will need to consider whether each debt on your list is a priority debt or not. Priority debts are debts where the consequences of not paying are serious, for example eviction for rent arrears, repossession for mortgage arrears, and disconnection of gas and electricity. Council tax, magistrates’ court fines, TV licenses and maintenance arrears are also priority debts because the consequence of non-payment can be imprisonment (as a last resort). Hire purchase debts are only priority debts if it is essential that you keep the item purchased.

b. Deal with priority debts first

Debts that are priority debts should be dealt with first. There are several strategies to deal with them, and which is appropriate depends on several factors, including your circumstances, who the creditor is and whether or not court action has been started/how advanced the court case is. Each strategy also has different consequences.

For example, if you are falling into arrears on your mortgage because of a temporary loss of income, due perhaps to taking maternity leave, your best option might be to ask the lender to agree that you will make interest only payments for an agreed period of time. This will have the effect that the bank will temporarily not take legal action against you for the arrears, but will also mean that the mortgage willnot be paid off.

c. Seek professional advice to help with choosing a strategy

Because the best strategy for dealing with priority debt depends on several factors, and because each strategy has different consequences, it is best to seek professional advice if you have priority debts. This is particularly important if your creditor starts a court case against you.

Options that you may wish to discuss with your advisor include:

• Making interest-only payments for a set period of time
• Making reduced or no payments for a set period of time
• Adding the arrears to the total amount due ("capitalising the arrears")
• Agreeing a schedule for repayment of the arrears. Repayments must be reasonable given your income and outgoings.
• Offering a lump sum in full and final settlement of the debt
• Writing off whole or part of the debt
• Making payments from your benefits (this can only be done in certain circumstances)
• Obtaining gas and electricity pre-payment meters.
• Once a strategy for dealing with the debt has been decided, contact each priority creditor with your proposals. Also ask creditors to confirm any agreement reached in writing.

NON-PRIORITY DEBTS

If you have any money left from your income less your outgoings and the payments you need to make towards your priority debts, you will then need to consider how to pay your non-priority debts.

As a general rule, if you have several non-priority debts and there is some money left to pay these, the money should be distributed amongst the non-priority debts fairly (equitable distribution). Also ask for interest to be frozen.

Equitable distribution means that each payment should be proportionate to the amount owed to that particular creditor. The formula to work out how much each installment should be is the amount of the debt, divided by the total amount owed, times the amount of income available to pay debts. So, if you had two debts of £2,000 and two of £1,000, and £100 a month available to pay towards your debts, the first two creditors would get £33.33 each and the second two would get £16.67 each.

However, equitable distribution is not always appropriate, for example in the situation where you have no money to distribute to creditors. Take advice on what to do, unless your debt situation is very straightforward.

IF THE CREDITORS WILL NOT ACCEPT YOUR PROPOSALS

In order to persuade your creditors to accept your proposals, you will need to send them a letter explaining your situation, and including details of your debts, your outgoings, your income and how you propose to pay your debts. Be sure to include in your outgoings any money that you have agreed to pay to your priority creditors.

There are standard forms and sample letters to creditors available to help you do this- see the further information section below.

If your creditors refuse to accept your offer, ask them to reconsider. Point out if other creditors have agreed to the offer and continue to make the payment you can afford anyway. Be persistent. Creditors often pass their debts on to debt collection agents. If this happens, don’t panic; just contact them with your budget and asking them to accept your offer of repayment. If your creditors/debt collectors are still not happy with your proposals, they may take you to court although this is unlikely if you continue to contact them and make payments. Take advice if this happens.

It is important to respond to court documents within the deadlines stated, so that the court knows what you can afford, and to attend any court hearings. Ultimately, the court will decide what installments you must pay taking into account your expenditure and income. Often the court will order that the installments are smaller than what the creditor wants, and in most cases interest will be frozen.

However if you do not pay the installments ordered by the court, the creditor can ask the court to take other steps to get the debt paid, for example by sending bailiffs to your home. If this happens take advice immediately.

It is a criminal offence to threaten or harass a debtor- if this happens to you, take advice. Advice on this can be obtained from a Citizen’s Advice Bureau as well as from your local Trading Standards Department.

There are private companies who offer a service whereby they agree to manage your debt for you, by providing advice and making payments on your behalf to creditors. Some companies who do this charge a fee for their service (they are known as Debt Management Companies) and some do not. Organisations who undertake this service without charging include CCCS and Payplan. You should take independent advice before agreeing to use a service for which you will have to pay.

For further help contact:

Working Families helpline for Disadvantaged Families on 0800 013 0313 – calls are free. Please note we do not advise specifically on debt, but can give benefits advice.

Your local Citizen’s Advice Bureau.

You can find out where your nearest CAB is on the Internet, at www.nacab.org.uk
Advice from the CAB is available at www.adviceguide.org.uk.

National Debtline,
The Arch
48-52 Floodgate Street
Birmingham B5 5SL
Freephone: 0808 808 4000.

Community Legal Service has a directory of agencies- call 0845 6081122
or look at their website at www.justask.org.uk

Consumer Credit Counselling Service
Tel: 0800 138 1111
or look at their website at www.cccs.co.uk.

Payplan Tel 0800 085 4298

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