Citizens Advice Bureau Guide to Managing your Debt
Step One - make a list of your debts
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 people 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
- 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.
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.
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.
Step Two - work out your budget
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.
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.
Step Three – sort out your priority debts
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.
Your local Citizens Advice Bureau can give debt advice in these cases. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
Step Four - sort out your non-priority debts
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
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.
Your local Citizens Advice Bureau can help you with advice about your options. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
You may have the option of:
- making offers to creditors yourself – see under heading Making offers to creditors yourself
- 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)
- putting all your debts into one loan. This is called loan consolidation – see under heading Putting all your debts into one loan – consolidation
If you have no money to spare
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.
Source: Citizens Advice Bureau