Before you can tackle a debt problem, you need to collect together information about your money affairs. Make a list of all the people and companies you owe money to (your creditors). You will need the following information for each debt:
the name and address of the creditor
the account or reference number
the amount you owe
a copy of the original loan agreement you signed.
It's a good idea to keep the latest letter or statement for each debt together in one place so that you can easily find them if you need them.
If you've received any court papers or letters that seem urgent, you may need to act quickly. If you are not sure from the papers what you should do next, get advice straight away from an experienced adviser.
Your local Citizens Advice Bureau can give you advice about a debt problem. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
Once you've made a list of all your creditors, you need to work out which ones to deal with first. You need to deal with some debts first before others because the consequences of not paying these debts can be more serious than for other debts. The debts you deal with first are called 'priority debts'. The debts you deal with after your priority debts are called 'non-priority debts'.
Priority debts
Priority debts include:
mortgage or rent arrears. If you don't pay these,you could lose your home
fuel arrears. If you don't pay these, you can have your fuel supply disconnected
council tax arrears. If you don't pay these, a court can use bailiffs to take your goods.If, after this, you still have arrears unpaid, you can be sent to prison
court fines such as magistrates' court fines for traffic offences. If you don't pay these,the court can use bailiffs to take your goods. If, after this, you still have arrears unpaid, you can be sent to prison. Parking penalties issued by local authorities are not priority debts
arrears of maintenance payable to an ex-partner or children. This includes Child Support you owe to the Child Support Agency.If you don't pay these, a court can use bailiffs to take your goods. If, after this, you still have arrears unpaid, you can be sent to prison
income tax or VAT arrears. You can be sent to prison for non-payment of income tax or VAT
TV licence or TV licence arrears. It’s a criminal offence to use a television without a licence. You could be fined.
You may have other debts which you think it is particularly important to pay. For example, if you're disabled and rely on your car to get around, you may need to make paying for your car a priority debt.
You need to think very carefully about which debts you treat as the most important ones. You must have very good reasons, as you might have to convince a court or your other creditors why it is reasonable for you to treat these debts as more important than others.
Non-priority debts
Non-priority debts include:
benefits overpayments
credit debts such as overdrafts, loans, hire purchase,credit card accounts and catalogues
student loans
money borrowed from friends or family
parking penalties issued by local authorities.
You can't be sent to prison for not paying non-priority debts. But if you don't make any offers to pay, without explaining why, your creditors may take you to court. If you still fail to pay when the court has ordered it, your creditors can take further action. For example, they can get another court order which allows them to send bailiffs round to take your property away. This will be sold to cover your debts.
List all the income and expenses for your household. Be honest and make sure that the amounts are realistic.
Under income, include:
wages or salaries for your partner and yourself. Put in your net earnings, that is, after deductions. This should be the amount you regularly receive. If the amounts are different each month, average them over three or six months
any benefits you are paid, including Child Benefit and tax credits
maintenance from an ex-partner for you or your children. Include any Child Support from the Child Support Agency
contributions from other members of your family and any lodgers.
Think about the ways in which you might earn extra money or increase your income. You may be able to claim benefits or tax credits. There's a useful website that lists organisations which give grants to people in need. For example, it lists some charities which give grants to people to help pay their bills or buy essential items. The website address is: www.turn2us.org.uk.
Under expenses, include:
housekeeping. Include realistic amounts for what you spend on food, toiletries, school dinners and meals at work, cleaning materials, cigarettes, sweets, children's pocket money and pet food.
housing costs. This should include mortgage or rent, a second mortgage or secured loan, buildings and contents insurance, service charges and life or endowment insurance cover attached to your mortgage
council tax
fuel and water charges
telephone charges
travel expenses. Include both public transport and the cost of running a car such as road tax, insurance, and maintenance
insurance that is not part of your housing costs (see above)
childcare costs
TV licence and any TV rental costs
clothes
any other essential expenses, such as medical and dental expenses or support for an elderly relative
money you should set aside for unexpected events and contingencies. This includes saving for things like the replacement of essential household goods when they break down.
When you've added up all the figures, you'll see if you have any money left over to pay your debts. You may even be able to see if you can make some savings. An advice agency can help you draw up a budget and help you increase your income if this is possible.
Money advice plus can help you draw up a budget sheet alternatively you can contact your local Citizens Advice Bureau can help you draw up a budget and claim benefits and tax credits. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
In England and Wales, you can print off a budget sheet to help you draw up your budget. See Budget sheet in Credit and debt fact sheets.
Don't ignore letters or phone calls from your priority creditors. Get in touch with them as early as possible and explain to them why you are in debt. If you phone, you should follow up the call with a letter, confirming what you said on the phone. Keep copies of any letters you write to them.
An advice agency such as your local Citizens Advice Bureau can help you write to your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
If your priority creditors are threatening to take court action or have started to take court action against you and you need a little time to sort out your finances, send them a holding letter explaining your problems. Say that you will contact them again within two or three weeks. Ask them not to take any further action during this time. For more about negotiating with your creditors, see under heading Negotiating with creditors.
When you have worked out how much you have left over after paying your expenses, contact each of your priority creditors and try to make an arrangement to pay back what you what you owe. For example, you may be able to pay an extra bit each month until the arrears are cleared. Or you may not have any extra money at the moment but know you will have a lump sum in three months' time which will clear the debt completely.
If you can’t afford to pay anything to your priority creditors and your situation isn’t likely to get better, the outcome may be very serious. Get advice straight away.
After dealing with your priority debts, you will need to work out how to deal with your non-priority debts. How you deal with your non-priority debts will depend on whether you have any money left over from dealing with your priority debts and paying for essential household expenses like housing costs and food.
If you have money to spare, you may have several options for dealing with your non-priority debts.
You should weigh up the advantages and disadvantages of each of these options carefully. Get as much information as you can before making a decision and don’t sign anything until you are sure it is the best option for you. If you have any questions, get advice.
asking a Debt Management Company to make offers for you – see under heading Debt management plans
applying for a court order that allows you to pay only a proportion of the debt. This is called an Administration Order – see under heading Administration Orders
arranging a legal agreement with your creditors. This is called an Individual Voluntary Arrangement (IVA) – see under heading Individual Voluntary Arrangements (IVAs)
If you have little or no money left after you have done your budget, you have nothing of value to sell and you think your circumstances are unlikely to get better soon, you will have limited options for dealing with your non-priority debts. The options you will have are:
Making offers to creditors yourself
Any money you have left over after paying your expenses and your priority creditors is called your available income. You can use this to pay off your non-priority creditors.
You should share out your available income fairly between all your non-priority creditors. This means you should offer each creditor a percentage of your available income, based on the amount you owe them. These offers are called pro-rata offers.
To work out your pro-rata offers, first of all multiply each individual debt by your available income. Then divide this sum by the total amount you owe to all of your non-priority creditors.
(Example box starts)
Example:
You have total debts of £15,000. You have available income of £200 a month. You owe £10,000 to credit card company A and £5,000 to credit card company B.
Credit company A
Multiply £10,000 (debt to company A) by £200 (your available income). This equals £2,000,000.
Divide this by £15,000 (your total debt). This gives you the sum of £133 per month to offer to company A.
Credit company B
Multiply £5,000 (debt to company B) by £200 (your available income). This equals £1,000,000.
Divide this by £15,000 (your total debt). This gives you the sum of £66 per month to offer company B.
(Example box ends)
This is the system used by the courts for working out what you can reasonably afford to pay and it is accepted by most creditors.
You will need to write to each creditor. Send them a copy of your personal budget and a list of your other creditors to show them how you have worked out your offers. Make sure you keep a copy of everything you send to your creditors.
Creditors don’t have to accept your offers but usually they will accept them if the amount you offer is fair. Creditors often want to look at your offer again after a fixed time, for example six months, to see if your situation has improved.
If creditors don’t agree your offer and you can’t persuade them, they may take further action.
For more about negotiating with your creditors, see under the heading Negotiating with creditors.
If you need more help making offers to creditors, you should get advice from an experienced adviser.
Your local Citizens Advice Bureau can help you negotiate with your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail,
