What will happen if I get into debt?
If you miss the odd credit card or loan repayment, probably not much will happen. There might be a penalty charge and, of course, your debt won’t have got any smaller and it might get recorded on your credit file.
But if you persistently miss credit card or loan repayments or fail to pay bills, you will quickly run into serious problems.
A County Court Judgement (CCJ) might be made if you are taken to court for non-payment. Following such an order, the Court can make an order for monthly payments to be made to the lender, possibly by direct deduction by your employer (this is known as an Attachment of Earnings Order). If you have assets it could grant a warrant of execution, whereupon assets could be seized and sold to repay the debt. Alternatively if you own your own home the creditor can seek to obtain a Charging Order, whereupon the debt will be secured on your home.
If you have more than one lender, then you can ask the Court to arrange an administration order which allows for all the debts to be added together. An administration order can only be made for debts totalling less than £5,000. One payment is made every month to the Court who share it out among the lenders.
If your debts are severe, you run the risk of a bankruptcy order being made against you. This is usually a last resort. Things you own then have to be sold and trustees control your money to ensure that lenders you owe money to get back as much as possible of the money you owe.
If you are made bankrupt on or after 1 April 2004, you will usually be ‘discharged’ after one year. If you were made bankrupt before this date, you will probably have been discharged on 1 April 2005 (or earlier if your bankruptcy was due in any case to end before then).
|If you are a home owner, a creditor can, in some cases, apply to the courts for a ‘charging order’ to secure the debt against your home or property. This means that when the property is sold, the lender would be paid out of the proceeds. These debts often continue accruing interest until repayment. This approach is often favoured by banks.
If you are bankrupt or have a County Court Judgement or a record of unpaid debts on your credit file, you will usually find it hard to get normal credit – eg a credit card, mortgage or other loan, or quarterly bill arrangement for the phone or fuel (this involves credit because you use the service in advance of paying).
What can I do to sort out my debts?
If you have a debt problem, it is best to face up to it sooner, rather than later. Take steps to sort it out, for example:
- work out your budget and decide how much you can afford each week or month to pay off your debts, putting priority debts at the top of the list.
- contact all your creditors as soon as possible. Explain the problem and how you intend to pay;
- offer to pay off the debt at an amount you can afford, even if it’s only a small amount per week or month. Most creditors know this is exactly what a court would order, so they have little to gain by taking you to court.
- cut out all unnecessary spending and cut up store cards and credit cards so you can’t run up more debts;
- can you increase your income – eg by working more hours, taking in a lodger, claiming benefit?
- consider switching to a basic bank account that doesn’t let you overspend but check that you will still be able to carry out all the transactions that you need to;
|If you can’t sort your problems out with the above, it is time to seek specialist advice on what to do next. There are many organisations who can help you. These can be Insolvency Practitioners, Accountants, Solicitors, Citizens Advice Bureaux, and various other agencies such as the National Debtline and a number of charitable organisations.
All the above should offer you free initial advice, either at a meeting or on the phone. Don’t be afraid to take a second opinion. Your advisor should display a working knowledge of all options available to you. If only one option is discussed, draw your own conclusions.
What are priority debts?
Some debts are more important than others because the consequences to you of not paying are so severe. These debts are known as priority debts. The law gives different creditors different ways of getting their money back. For example:
- if you fail to pay rent, a court order could be made to evict you;
- if you don’t keep up mortgage repayments, the lender can ask the court to make an order to evict you and sell your home;
- if you don’t pay fuel bills, your gas or electricity can be cut off;
- if you don’t pay your phone bill, the phone can be cut off;
- if you don’t pay council tax, you can be sent to prison;
- if you don’t pay income tax, the Inland Revenue may take bankruptcy proceedings;
- if you don’t pay court fines, you can be sent to prison.
Under no circumstances should you ignore priority debts. It is important you use your available money to pay these first. Do not pay other people you owe money to (secondary creditors) until you have reached an agreement with all of your priority creditors. Secondary creditors include:
- Unsecured loans
- Credit Cards
- Hire purchase agreements for non-essential goods
- Store cards
- Catalogue and mail order
- Repossessed house or car loans
You can solve your problems by contacting the people you owe money to or the many organisations willing to help you – so get advice now. Here are some tips that should help you get started.
- Get free advice. The Money Advice Service, set up by the government, is a good independent resource for all home finance matters.
- Don’t panic or ignore the problem: unopened bills won’t go away.
- You can’t ignore your debts. Better to pay a small amount than nothing at all – those you owe money to may be prepared to accept low repayments.
- If struggling with store or credit cards stop using them.
- Work out a realistic budget that covers all your income and spending. Check whether there are any benefits or tax credits you are entitled to that you are not getting.
- Decide which debts take priority – like mortgage or rent – and which cost you most through penalties or higher interest rates.
- Only agree to pay off debts at a rate that you can keep up – don’t offer more than you can afford.
- Contact those who you owe money to as soon as possible. Let them know that you are having problems. Many companies will be helpful if you talk to them.
- If organisations won’t accept your repayment offers, seek advice.
- If you get a threatening letter get advice from your local Citizens Advice Bureau or trading standards service.
- If a debt collector calls at your home you don’t have to let them in. If you want time to get advice arrange a later appointment. If a debt collector or lender harasses you contact your local Citizens Advice Bureau or trading standards service.
- Check if a loan will be secured on your home. If it is and you do not keep up repayments you could lose your home. If you do not understand the terms of a loan get advice.
- If you’re thinking of taking out a new loan to pay off debts make sure you find out the total cost of the loan, not just the monthly repayments.
- Think very carefully before borrowing more to pay off your debts. Get impartial advice and don’t rush into signing anything you don’t understand.
- If you are thinking of using a fee-charging debt management company, then make sure you understand exactly what you are signing up to – check what fees you will be paying to a debt management company and how long it will take you to pay off your debts. Thousands of people in the UK are mistakenly advised to enter into debt management plans when they would be better off seeking alternative options.
- Keep copies of all letters you send and get about your debts.
|The information that follows is intended to give an insight into the principal solutions to serious debt issues (i.e those that you cannot resolve simply by speaking to your creditors) and also to point out the pros and cons of each. In the interests of transparency, we would point out that we are Licensed Insolvency Practitioners, specialising in Individual Voluntary Arrangements and, in lesser numbers, Bankruptcies. Our services: