Debt

Ten golden rules for dealing with debts

• Don't ignore the problem. It won't go away and the longer you leave it the worse it gets.
• Get in touch with your creditors straight away and explain your difficulties. Get a contact whom you can go and see or phone or write to using the sample letters below.
• If the person you speak to is unhelpful, ask to speak to somebody more senior who may be able to agree to what you want.
• Make sure you tackle your priority debts first - the debts which can mean losing your home or having your gas or electricity cut off. This page tells you what these are. You can't go to prison for most types of debt.
• Fill in the reply forms to court papers and let the court have all the facts. You should supply a copy of your financial statement.
• Attend court hearings. Take a copy of your financial statement with you. Don't think that going to court makes you a criminal. It's not that kind of court. Most hearings take place in private.
• Don't borrow money to pay off your debts without thinking carefully. Get advice first. This kind of borrowing will usually make matters worse.
• Always answer creditors’ letters or phone calls. Don't give up trying to reach an agreement even if they are being difficult. Be persistent.
• Remember the council is here to help at each stage with letters and forms and it can explain what to do if you are asked to go to court.
• Don't give up and don't panic.

What are priority debts?

The law gives different creditors different ways of getting their money back. Therefore, some debts are more important than others. Here is a list of kinds of debt and the action that may result if you cannot reach an agreement.

These are priority debts. It is important to use your available income for all creditors to make agreements and settle these debts first. Don't make offers on your other debts until you have negotiated instalments to pay these priority creditors.

Money going out: expenses

Work out how much money you have to pay out each week/month on the basic living expenses on your financial statement. At this stage don't include any debts, arrears or any credit payments.

Council tax:

Check whether you are entitled to Council Tax Benefit and/or a discount and see if you can pay in weekly or monthly instalments. Many councils ask for the amount paid over 10 months rather than 12. If this is the case, put down the amount you have to pay every month.

Water charges:

Water companies may accept weekly or monthly payments rather than half yearly.

Gas and electricity:

Work out the cost of your bills over the year. Divide by 12 if you are budgeting monthly. You can ask to pay by budget scheme or have a meter installed. Ask your local council about home insulation grants. If you are on Income Support or Job Seekers Allowance (JSA) you can pay for your arrears by Fuel Direct.

Food and household items:

For food, put down the amount you spend on your weekly shopping, the milk bill and the cost of extra items you might buy during the week. You should also include the cost of household items, for example, washing powder, soap, shampoo, toothpaste, sanitary towels and disposable razors. If you are not sure exactly how much you spend on food and household items, allow about £20 per week for each person who lives with you. However, if you or anyone else who lives with you needs a special diet (for example, a diabetic) or has other special needs, you will need to increase this amount. You should explain this on any letter you write to your creditors.

TV/video rental:

You should include the monthly cost of renting a TV and/or a video. Most of your creditors will accept that expenditure on these items is essential.

TV licence:

Consider buying licence stamps from the Post Office to save up for your next one. You can also pay by direct debit in 12 instalments.

Other housekeeping items:

In this section, you should include your leisure expenditure such as the cost of trips to the cinema, alcohol and cigarettes. You may find that some of your creditors will ask you to justify this area of expenditure or insist that you get rid of it altogether. See if you can cut down, but be realistic.

Essential travelling expenses:

These should include travelling to work, school and for shopping. If you are running a car include the cost of tax, insurance, repairs, MOT, servicing as well as petrol.

Clothing:

Look at your clothing expenses over a year. Only include non dependants if you pay for their clothing. Remember to include school uniforms. As a rough guide, allow £5 per person per week.

People on Income Support or JSA can get help with school meals and may get assistance with the cost of uniforms. Contact your Local Education Authority for more details.

Importance of the financial statement

This document is sent to creditors, so great care must be taken to ensure that it fairly represents your financial circumstances. Standard forms are provided for printing. To use these files you will need Adobe Acrobat Reader. If you do not have this on your computer please use our advice page.

• First complete the income (pdf 59.3KB)and expenditure (pdf 64.8KB) sheets. Use either weekly or monthly figures, whichever suits you best. Don't mix the two. Be realistic with your offers. Then complete the financial statement in pencil.
• The financial statement also needs to list agreed payments for priority creditors. This normal contractual spending (for example, on rent or mortgage) or regular spending (for example, on fuel) should be included in expenditure. It is only the arrears of these items which should be listed under priority creditors.
• You are now ready to negotiate with creditors. If you need advice phone your money advice worker.

From the financial statement you will be able to calculate whether or not there is any available income to make offers to non priority creditors.

How to pay priority debts

Priority debts must be offered payments first. In order to settle these write with proposals on how you aim to do this.

Remember to be realistic and do not offer more than you can afford.

How to repay credit debts

After paying your expenses and making arrangements with priority creditors, you will need to negotiate your non-priority debts according to now much money you have left.

If you have nothing left, say so. Show your creditors by sending them your financial statement, and contact the council for further advice.

If you have something left, this is how to divide it up. In this example, the amount owed is:

After paying the debt and living expenses there is £30.40 per month left for other creditors.

When you have more than one debt you have to decide how to divide the money for creditors fairly amongst them. The normal way of doing this is called pro rata distribution. This means the biggest creditor gets the biggest share of the money.

This is how to divide the £30.40 fairly between the creditors:

Multiply each individual debt by available income for all creditors (in this case £30.40), then divide by the total amount owed (in this case £5,335).

Use a calculator to work out your payments. You may find it easier to round your offer down to the nearest 10 pence. Most creditors are happy to accept this.

The following file are samples that will help you to compose letters to your creditors:

• Holding letter (pdf 59KB)
• Offer letter (pdf 74KB)
• Nil offer letter (pdf 81KB)
• List to be sent to each creditor (pdf 62KB)

To view these files you will need Adobe Acrobat Reader. If you do not have this on your computer please use our advice page.

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Court action for non-priority debts

Owing money on credit debts is not a criminal offence. Action to recover these debts will take place in the County Court. The County Court is there to ensure that justice is done between borrower and lender. It is not there to serve the interests of the creditor alone.

Some debts, for example, regulated consumer credit agreements, may require a default notice to be served before any further action is taken. It must be issued by a creditor for all debt regulated by the Consumer Credit Act 1974 before court action can start. You must be given at least seven days to carry out action required by the notice. If the notice is requesting payment it must contain a statement about time orders and about seeking advice from a Consumer Advice Bureau (CAB), solicitor or trading standards department.

If/before any court action is taken:

• You will receive a default summons stating what your creditor claims.
• If you do not agree with the amount claimed in the summons seek further advice from the council about disputing the amount claimed.
• If you agree with the amount claimed in the summons, you should return the form of reply (Form N9A) which is attached to the summons. Use a copy of your financial statement to help you fill in the form, and send a copy with the form. If you have no money left after paying priority creditors, please phone your money adviser who will advise you further. Send the Form N9A to the creditor or their solicitor.
• If the creditor accepts your offer you will receive an order to pay from the court called a judgement.
• If your creditor does not accept your offer, court officials will decide the rate of payment and make a judgement. If you do not agree with the amount ordered by court officials you can request a reconsideration and a hearing will be arranged with a District Judge who will decide what you should pay.
• Monthly payments ordered by the court can be reduced if you cannot afford them. You can apply for a reduction by using Form N245 which is available from any county court office. There is a fee, unless you are on Income Support or JSA.

Advantages and disadvantages of court action

If creditors start county court action to get their money back, this can have advantages for you.

• The court is likely to let you pay a monthly amount, which you can afford. But it can only do this if you tell it about your income and expenditure.
• After a county court judgment has been made, you might be able to apply for an administration order This is a way of putting together many debts as a monthly payment to the court. The court office then shares it out among your creditors. The amount you pay each month is worked out by looking at your income and expenditure. An administration order can only be used for total debts under £5,000. If you are in receipt of benefits no court costs will be incurred. It may be possible for part of the debt to be written off.

If you want to apply for an administration order please seek further advice.

There can also be disadvantages if creditors take court action.

• Court costs are added onto your debt and are fixed on a sliding scale depending upon the amount owed.
• If a county court judgement is made and you cannot pay straight away your name will be put on a Register of County Court Debts for six years and you will find it difficult to get credit. You can ask for your name to be removed once the debt is paid.
• If you do not pay the monthly amount that the court has ordered on the judgement, your creditors may take further enforcement action against you. This action can be directed against your goods, savings, earnings or property. So it is important to pay monthly payments regularly or apply for them to be reduced by completion of a Variation Order (N245); these forms can be obtained at the local County Court. Please contact the council if you want to discuss this further.

Please remember:

• That you have rights as well as your creditors.
• If you tell the court everything that you can about your income, expenses and debts, and attend court hearings when asked, you should be allowed to repay the debts at a rate you can afford. Attach a copy of your financial statement to any court forms and take a copy to court proceedings.
• If your income goes up or down or your expenses increase, you can ask the court to review your payments on Form N245.
• If you do have to attend a court hearing, your name will not appear in the local papers.
• The county court is not a criminal court. It is not there to punish anyone.
• The court staff and the District Judge who decide the cases are used to dealing with people who do not have a solicitor. If you receive a letter or form from the court that you do not understand take it to the court and ask for an explanation, contact the council.
• You can always take someone along to court with you, for example, a friend or interpreter.
• If a County Court judgement has already been made a variation order, form N245 can be obtained from your local County Court. This allows you to apply for a suspension of a Warrant of Execution or a reduction of instalment order.
• Section 40 of the Administration of Justice states clearly that a debtor should not be harassed, humiliated or coerced into paying more than they can afford. If you are persistently being harassed please contact your local Trading Standards Office or CAB.

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