|Debt options||Specific debts|
There are several strategies and methods for dealing with debts and these are outlined on the gov.uk website. There are several charities that specialise in debt advice such as StepChange and PayPlan. You should think carefully before responding to television advertisers offering debt solutions as some are more interested in their profits than your financial wellbeing.
Debt Camel is an independent web site that provides a wide range of debt advice.
Central to many of the approaches is a budget, an income and expenditure statement or a financial statement (these are three similar documents which contain much of the same information) and there are several online services that help prepare these. To help with resolving debts problems, you should also take action to maximise your income and minimise what you spend: ways of approaching this are dealt with on a separate page.
Finally there are some links to sites providing advice on particular aspects of debt such as Council Tax arrears, rent arrears and dealing with bailiffs.
Priority and non-priority debts
It is essential to understand this distinction and how to approach the two types of debt. The difference lies in the sanctions which can be applied when the debts are enforced: priority debts have more serious consequences and that makes dealing with them more urgent than the others.
|mortgage arrears||repossession and eviction|
|council tax arrears||imprisonment|
|unpaid fines or maintenance||imprisonment|
|gas and electricity arrears||disconnection|
|income tax or VAT arrears||goods taken by bailiffs, bankruptcy|
|hire purchase arrears||goods repossessed|
Source, CPAG Debt Advice Handbook, 11th edn., 2015
Debts such as credit cards, overdrafts, payday loans and catalogue purchases, benefit overpayments and student loans must be dealt with but not as urgently.
Hire purchase arrears, water rates and parking fines can fall into both categories:
- Hire purchase arrears can result in repossession of the goods but this might be considered less important than losing your home.
- Water companies are not allowed to disconnect the water supply to residential property, but arrears can eventually lead to imprisonment.
- Non-payment of parking fines issued by the courts can ultimately result in imprisonment but local council parking fines are initially regarded as non priority.
It is important to remember that non-priority debts cannot be ignored. Your creditor can take you to court and that could lead to bailiff action, but the threat is not so immediate nor sometimes as serious as the consequences of priority debts.
These are the options you have for dealing with your debts. Note that not all debts can be written off through the formal insolvency solutions: the main exclusions are student loans, court fines fraudulent debts, maintenance orders and social fund loans. The Money Advice Trust has produced a useful flowchart showing the options available, depending on personal circumstances, link here.
|Negotiate with your creditors||This is an informal arrangement where you contact all your creditors and try to agree reduced payments. You can also ask them to freeze the interest on the debts, accept token payments temporarily and even write off the debts. They may not agree.|
|Debt management plan (DMP)||Another informal arrangement applying to non-priority debts where you make a single affordable payment every month that is shared between you non-priority creditors. It is arranged by a DMP provider who negotiates with the creditors: some providers are free, others charge a fee. Again, the creditors can refuse to cooperate.|
|Administration Order (AO)||This is a formal arrangement, available to those with at least two creditors, a maximum of £5,000 total debt and who already have a County Court Judgment (CCJ) against them. Mortgage and rent arrears are not normally included. After (usually) three years of affordable payments, the debts are written off.|
|Individual voluntary arrangement (IVA)||Another formal arrangement for those with over £10,000 of debt and more than £100 available each month after their bills are paid to share between the creditors (and the IVA provider who will charge a fee). It does not cover all debts, it is expensive and you are likely to lose your savings. IVAs usually run for 5-6 years.|
|Consolidation Loan||A debt consildation loan is used to pay of all the creditors, leaving just one debt to service. You will need a decent credit rating, sufficient excess income to service the loan and the discipline to avoid new credit agreements. It does not reduce the amount of debt and so will probably have to run for a long time.|
|Debt Relief Order (DRO)||This has been called bankruptcy lite. If you are not a homeowner; your debts do not exceed £20,000 (recently increased); your assets and your car (if you have one) are each worth less than £1,000; and you have less than £50 available each month to pay off your debts, then a DRO can get most of your debts written off after 12 months. It does not apply to all debts and it costs £90.|
|Bankruptcy||This was first allowed under English law in 1542. Most debts are written off after 12 months but you could lose your house and your business or your job. The cost has recently reduced to £680, with the introduction of an online system for personal (not business) applications.|
Before deciding how to deal with you debts, it essential that you take advice. This could be from you local Citizens' Advice Bureau, the debt charities already referred to or a number of other bodies, but it would be sensible to check that the advice is from a charity and that it is independent and free.
|CAB and the Debt Advice Foundation also offer budgeting tools.|
|Debt Camel has a good page on Financial Statements.|
Specific Debts and Outcomes
The following links will take you to sites with further details of debts and their consequences,
|Council Tax arrears|