10 steps to sorting out all of your debts

You owe money to the catalogue company, your rent/mortgage is overdue, you owe Council tax arrears, your credit card is at the limit, and they're all asking for money - now! What do you do?

Step 1. Don't panic!

No matter how desperate things seem, there are ways to manage your debts. If you feel totally swamped, and don't know what to do, go to an advice agency for help. But there are some things you can do yourself.

Step 2. Check you actually owe the money.

Are you responsible for the debt?
If you are responsible ('liable') for a bill, it means that you can be taken to court or have bailiffs come round to try to take your stuff to pay the debt. Despite popular belief, husbands, wives, partners, and family members are not normally responsible for each other's bills. In most cases the person who is liable will be named on the bill. However, in some cases it's not so simple. For example:

• If you live with other people, they may be responsible for gas or electricity they used, even though their name is not on the bill. If you are being chased for a debt that somebody else (perhaps an ex or a flatmate) helped build up, tell the company concerned.
• Credit agreements are not enforceable against people under 18, even if they’ve lied about their age to get credit.
• Debts normally die with the person who owed them. Surviving partners and relatives do not have to pay them off. However, the people who are owed money can make a claim on the money and possessions left behind (the ‘estate’).
• Many debts expire after six years (or 12 years for a mortgage).
• Some credit agreements are not enforceable if they are very unfair. For example, if you did not have the chance to read all of a contract or cancel the agreement. If you think your agreement was unfair it is worth checking with your local Trading Standards Office.

   

  Benefits / Tax Credits Overpayments!

  You should quickly seek advice if you receive any letters notifying you that you have been overpaid because the normal time limit for appealing is only 1 month!
  If you have a tax credit overpayment see our Tax Credit overpayments guide

Step 3. Are the amounts they claim you owe correct?

Check their sums, and check that they've received all the payments you've made. If you think the amount is wrong, write to them saying why you think there has been a mistake.

Step 4. Prioritise the debts.

Some types of debt need sorting first, because they can cause you serious problems if you don't pay them. The most important debts are called 'priority debts'.
Priority debts include:

• Rent or mortgage - if you do not pay them you could lose your home.
• Loans secured on your home - if you don't keep up the payments, you could lose your home.
• Council tax - if you do not pay, you could end up with a bailiffs visit, which will increase the amount you owe, and could mean your belongings are taken away to pay the debt. You could even be sent to prison.
• Income Tax, National Insurance contributions and VAT - if you have underpaid these, you could end up with a bailiff's visit or face bankruptcy.
• Gas and electricity bills where you are currently living - if you don't pay your bills, you could be disconnected.
• TV Licence - if you refuse to pay, you could be fined or even sent to prison.
• Child support and maintenance - if you are late paying, you can be made to pay by the Court or the Child Support Agency.
• Court fines - if you do not pay these, they can force entry into your home and seize things belonging to you. They can even send you to prison.
• Parking fines or similar - if you do not pay these, they can seize your vehicle.
• Anything you are buying on a Hire Purchase agreement - if you have not yet paid one third, they can repossess the thing you buying without a court order.

Other debts are called non-priority debts.
You should deal with these after you have dealt with any priority debts, because the result of not paying them is less serious. Creditors can take you to the county court (this is different from the criminal court, you won’t be handcuffed or sent to jail). The court will look at how much you can afford to pay towards your debt each month. As long as you keep to the payments that the court orders, the creditors can't take any further action against you.
Non-priority debts include:

• credit cards and store cards;
• catalogue debts;
• debts with water companies;
• book clubs and catalogue orders;
• gym and health club memberships;
• 'unsecured' loans; and
• personal debts to friends & family

Step 5. Do the 'firefighting'.

This means take steps to stop the people you owe money to from taking immediate action against you. Firefighting action gives you a chance to work out plans to pay off your debts. You may need to make emergency phone calls if a creditor has threatened legal action against you. When you make the call, the creditor may agree to hold action for a certain period of time, to allow you to work out a repayment offer, or give time for you to take money advice etc. This is sometimes called a "holding agreement". Back up any holding agreements by a letter, fax, or email. Get advice immediately if the fire fighting fails.

Step 6. Maximise your income.

Check that you are receiving all the benefits that you are entitled to. There are many types of benefit you could get, depending on your circumstances, including Housing Benefit, Council Tax Benefit, Tax Credits (if you are working or if you have children), disability benefits, Income Support or income-based Jobseeker's Allowance. An advice agency should be able to tell you which ones you might be able to apply for. They may also be able to access charitable funds for you.

Step 7. Draft a financial statement.

This means working out your regular income and the amounts you spend on the things you really need, not including debt payments. Creditors aren't very sympathetic about costs for cigarettes, socialising, cable TV, and high allowances for, for example, phone calls and food for pets. It's best to allow a modest figure for extras and emergencies. Calculate your 'disposable income' - the amount of money you have left over to offer creditors, after your basic needs have been paid for. If the figure turns out to be zero or even less, don't panic - but get advice.

Step 8. Negotiate with creditors.

Once you have worked out your disposable income figure, you can work out how much to offer each creditor. The priority debts come first.

If you receive Income Support or income based Job Seekers Allowance, you could agree to having ₤3.25p a week deducted from your benefit to cover repayment of priority debts such as Council Tax, gas, and electricity.

You can contact the people you owe money to at any time and offer to pay some money - even if you cannot pay it all. The sooner you do it, the better. If your disposable income figure isn't enough to cover the priority debts, get advice straight away. Contact your local advice centre or National Debtline for more information (search for your local advice centre using the box on the right - or follow the link to the right for National Debtline).

You can be tougher with the non-priority creditors. Write to the creditors explaining your situation - for example, if you are struggling to pay because you are on a low income, you’ve lost your job, you’re sick, etc. Ask them not to take any court action against you, and to stop adding interest or any other charges to your account. You should also offer to make small payments - but only offer what you can genuinely afford, even if it is as little as £1 a month. Don’t make promises you cannot keep. National debtline has some useful smaple letters that may help you (see links to other websites).

It is sometimes possible to get non-priority creditors to agree to zero payments for a certain period. A debt adviser may even be able to get some debts written off entirely, if they can show the creditor there is no real chance of you being able to pay. However, don't build your hopes up - not surprisingly, creditors are extremely reluctant to do this, and they are under no legal requirement to agree.

Step 9. Put all agreements in writing.

Send your creditors a letter confirming what you have each agreed. Keep a copy.

Step 10. Check your payment progress from time to time.

If your income drops, review your payments, but write to the creditors before you change how much you pay them. If your income increases, consider increasing payments, so that you'll be debt-free quicker.

August 2009