You may have debts, other than priority debts. These can range from a few pounds owed to a catalogue company or a family loan, to thousands of pounds for bank overdrafts, payday loans, credit cards, store cards and so on. All these debts grouped together are commonly known as non-priority, secondary, or credit debts.
You need to know exactly how much you owe for each of these debts, so you may have to contact your non-priority creditors. Make sure you have your reference numbers to hand.
At this stage, you should already have completed Steps 1-4 and Step 5, so you should know how much money you have left over after you have paid all of your essential expenses and your priority creditors.
Before thinking about options for dealing with your credit debts, it is worth noting the following:
- Only the person who signs an agreement is responsible for the debt. A husband or wife are not responsible for each others debts unless they both sign the agreement
- If you take out an agreement jointly with another person you are each responsible for the whole debt and not just part of it. Make sure the creditor knows that someone else is responsible
- If one of your creditors is your main bank account, you should consider opening a different account elsewhere and arranging to have your income paid into this new account, before you contact this creditor
Options for dealing with non priority-debts
There are a number of different options for dealing with non-priority debts. The option you choose will very much depend upon your personal circumstances.
If you do have some money left to pay to non–priority creditors
Pro-rata payments - this is a way of ensuring all of your creditors get a fair share of the money you have available. It is worked out using a formula. You will need a calculator to do this part.
Money left over × each debt ÷ total money owed to all non-priority creditors = offer to creditor. This probably looks more complicated than it is. Here is an example to help:
Mr and Mrs Smith have £50 per month left after all their essential expenses and payments to priority creditors. They owe £3,600 in non-priority debts - £800 to a credit card, £300 to a catalogue and £2,500 loan to their bank.
£50 × £800 ÷ £3,600 = £11.11 payment to credit card
£50 × £300 ÷ £3,600 = £4.17 payment to catalogue
£50 × £2500÷ £3,600 = £34.72 payment to bank loan
Do this calculation for all your non-priority creditors and write the offer amounts next to the balances on your budget sheet.
Now you need to send a copy of your budget sheet to your creditors with a covering letter, making the pro-rata offer of payments. Remember to ask for interest and charges to be frozen.
If your creditors refuse to accept an offer of payment, you should continue to make the payments anyway.
If you have no money left over to pay creditors
No payments or token payments
If you have no money left after your essential expenses and payments to priority debts, you need to let your non-priority creditors know this. Write to them, enclosing a copy of your budget sheet. You can either ask your creditors to hold action until your circumstances improve (this is sometimes called a moratorium) or you can make an offer of a token payment of £1 per month to each creditor. Ensure you also ask that the creditor freezes any interest or charges.
Debt management plans
A debt management plan is set up through a debt management company and involves making one payment that is then split between your creditors. Be careful when choosing a debt management company. Most companies that advertise on the internet and in newspapers tend to charge quite high fees. For further information about debt management plans, contact us.
The disadvantage with an informal arrangement is that it is not legally binding so some creditors may not freeze interest and charges or could ignore it in the future, requesting full payments and possibly re-instate interest. Other possible future options could include the following:
- Full and final settlement - if you are able to raise a lump sum, you can ask creditors to accept a lump sum payment and write off the remainder of the debt.
- Administration Order - if your debts are below £5,000 and you have at least one County Court Judgement, you can apply to the court for an Administration Order. This is a way of putting all your debts together and making one payment to the court that is then split amongst your creditors. You can get an application form from your local court.
- Debt Relief Order (DRO) – this may be an option for people with little surplus income and few assets. To qualify for a DRO your total debts must be below £30,000, you must have assets of less than £2000 you are not a homeowner and you have less than £75 a month disposable income (after deduction of normal household expenses). Please call us if you would like further advice on DRO’s.
Information on Debt Relief Orders.
- Bankruptcy - it is unlikely that a creditor will make you bankrupt. You can however apply to make yourself bankrupt. The fees involved are high and bankruptcy can have serious consequences, particularly if you own your home. Bankruptcy can be a solution if you owe a lot of money, have no assets and can see no way of ever paying off your debts. If you are considering bankruptcy Contact us for further advice.
- Individual Voluntary Arrangements (IVA) - an alternative to bankruptcy is an IVA. This is a formal arrangement through the County Court to pay an agreed amount off your debts over a shorter period, such as five years. The rest is then written off. IVA’s need to be set up by an Insolvency Practitioner whose fees can be quite high.
If you are considering an IVA, Contact us for further advice.
What can you do if your creditors harass you?
If you do not pay your creditors, you must be prepared for them to continue to contact you regarding the debt. However, they must not do anything illegal. If they threaten or harass you to try to make you pay, they may be committing an offence.
You cannot be prosecuted in the criminal courts because you have not paid your credit debts, but some creditors might try to make you think that you can – this is also unlawful.
What should you do if your creditor takes you to court?
Many people are frightened of courts, especially if they feel guilty because they owe money. The County Court is not there to judge whether anyone is guilty or innocent, but to settle disputes about money owed and how to repay it. The Court is not there to serve the interest of the creditor alone.
If court action is taken against you
- You will receive a default summons, telling you how much the creditor says you owe
- There will be a reply form with the summons for you to make your offer of repayment. Send this to the court with a copy of your budget sheet
- The court will pass on your offer to the creditor. If they accept it, you will receive an order to pay that amount
- If the creditor does not accept your offer, the court will give you a date for a hearing. Go along to the hearing so that you can explain your circumstances
- Monthly payments through the court can be reduced if your circumstances change or if you can’t afford them
- Court costs are added to your debt
- If you do not pay the amount which the court orders, the creditor may take further action and this can include bailiffs calling. For advice on dealing with bailiffs see Step 7: Dealing with bailiffs
For further advice, you can contact our Welfare Rights and Money Advice team.