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Friday, 01 August 2014

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How to deal with creditors

If you’re in debt, it’s important to keep in contact with the people you owe money to (your creditors).

If you’re very worried about your debts, you may be afraid to contact them, but you can get help to do this. If your creditors don’t know that you’re having financial difficulties, they’ll assume you don’t want to pay and start taking action against you.

For example, they could take you to court or, in some cases, they could send bailiffs round to take away your belongings.

It’s almost never too late to start talking to your creditors and most creditors will appreciate it if you contact them.

To be able to deal with your creditors, you’ll need to sort out how much money you owe and who you owe it to. Then you’ll need to sort out whether you’ve got any really urgent debts to pay off and if you’ve got enough money to pay back these, as well as any other less urgent debts you may have.

Some debts are more urgent than others because the consequences of not paying them can be more serious than for other debts. These are known as priority debts and include things like mortgage, rent and council tax debts. The people you owe this type of debt to are called priority creditors.

Debts which are considered to be less urgent than priority debts are debts such as credit card debts, overdrafts and other unsecured loans. These type of debts are known as non-priority debts.

If you have any priority debts, you must make sure you can pay these first before coming to any arrangements with non-priority creditors.

If you don’t have enough money to pay off your non-priority creditors, you’ll need to think about your options very carefully. You may need help to deal with your non-priority creditors. You can get free help to deal with your creditors from your local Citizens Advice Bureau.

Non-priority debts include:

  • Benefits overpayments
  • Credit debts such as overdrafts, unsecured loans, credit card accounts and catalogues
  • Hire purchase or conditional sale (except for essential items)
  • Water and sewage charges – you can’t be cut off for water debts
  • Student loans
  • Money borrowed from friends or family
  • Parking penalties issued by local authorities (but parking fines issued by the courts are priority debts).

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 that allows them to send bailiffs to take your property away. This will be sold to cover your debts.

To work out whether you have enough money to pay off your non-priority debts you will need to work out how much money you have got coming into your household and how much you need to spend. This is called your budget.

You will also need to work out whether you have any priority debts and make sure you have got enough money to pay these off first, before you can deal with your non-priority creditors.

Any money you have left over after paying your expenses and your priority creditors is called your available income.

You can use this available income to pay off your non-priority creditors.

You should share out your available income fairly between all your non-priority creditors. This means you should offer each creditor a percentage of your available income, based on the amount you owe them. These offers are called pro-rata offers.

To work out your pro-rata offers, first of all multiply each individual debt by your available income. Then divide this sum by the total amount you owe to all of your non-priority creditors.

This is the system used by the courts for working out what you can reasonably afford to pay and most creditors accept it.

Once you have worked out how much you can afford to pay your non-priority creditors, you will need to write to each of them.

Send them a copy of your personal budget and a list of your other creditors to show them how you have worked out your offers. Make sure you keep a copy of everything you send to your creditors.

You can use our online budgeting tool (www.adviceguide.org.uk) to help you work out how much you have to pay off your non-priority debts. This lets you print off a financial statement that shows your creditors how you have worked out your offers.

Creditors don’t have to accept your offers but they will usually consider any reasonable request or offer of repayment that you make.

If creditors won’t accept your offer and you can’t persuade them, they may take further action. It’s important that creditors can see that what you are asking for is reasonable in the circumstances. So make sure you are clear about what you are asking for:

Always ask to freeze interest. Unless they freeze interest, your debt will carry on growing even if you are making regular payments

Tell them the regular payment intervals you are able to offer, that is, whether you can pay monthly or weekly

Mention any changes that you know are going to happen which will affect your ability to pay or the amount you are offering.

Keep copies of all your letters to creditors and their replies and a note of any phone calls with them, in case you need them later.

Even if your creditors accept your re-payment plan and you stick to the plan, this won’t always stop them taking court action against you. So it’s really important that you don’t ignore any letters from your creditors, even if you believe you have reached an agreement with them.

You don’t have to deal with your non-priority creditors yourself if you don’t want to.

You can get free help to deal with your creditors from your local Citizens Advice Bureau.

You may also be able to get a debt management company or an insolvency practitioner to deal with your non-priority creditors for you.

You will sometimes find that creditors won’t accept your offers at first.

This may be the case even if you used an advice agency or debt management company to help you deal with your creditors.

If creditors do not reply to your offers, start paying them what you can afford anyway and get advice.

After working out your household budget, you may find you have no money left over to pay your non-priority creditors.

You should check whether you can increase your income in any way, for example by claiming a benefit or renting a room in your house.

Think about how much you spend on items and whether you can make any cutbacks. If you can make cutbacks, this may make some money available for you to pay back your debts.

But, be careful about cutting back on essentials such as food and clothing. You may not be able to manage on lower amounts in the long term.

If you can’t offer any money to your non-priority creditors, explain why. Ask the creditors if they’ll freeze the interest and charges and let you stop making payments for three to six months.

Say you’ll contact them as soon as your situation changes and you’re able to start payments again.

Or you could try making a token offer of £1 a month to all your creditors.

This is only a short term solution; otherwise it can take years to pay off what you owe. If you don’t think your situation is likely to get any better, you will need to consider what to do next very carefully.

You may need to think about options such as bankruptcy or a Debt Relief Order. You may want to get advice from an experienced debt adviser. You can get free debt advice from your local Citizens Advice Bureau.

If you have credit card debts and the debt hasn’t been passed to a debt collector, you should be allowed a period of grace to agree a repayment plan with a non-profit debt advice agency, such as a Citizens Advice Bureau. This should be a period of at least 30 days.

If you can’t reach an agreement with one of your creditors to pay off your debt, they may take you to court.

If your offer is refused or you don’t accept that you owe the money, you should get advice from an experienced debt adviser.

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