I've got lots of debts. Which one should I pay first?
Some debts are more important to pay than others. The debts that are most urgent are those where non-payment can have harsh consequences. These are referred to as ‘priority debts’. For example, you can be sent to prison for not paying your Council Tax arrears but if you fail to pay a credit card bill you can not. This is why it is always important to make arrangements to settle the priority debts first, even if you are receiving more pressure to pay the non-priority debts.
Examples of priority debts:
- mortgage or rent arrears;
- arrears on secured loans;
- Council Tax arrears;
- magistrates court fines;
- gas and electricity arrears;
- TV licence arrears;
- child maintenance arrears; and
- hire purchase arrears.
Examples of non-priority debts:
- credit card or store card debts;
- personal loan arrears with a finance company;
- bank loan arrears and overdrafts;
- catalogue payment arrears;
- personal debts to friends or family; and
- doorstep-collected loan arrears
A specialist money adviser at the organisations listed below (not debt management companies that you may have seen advertised on television) can assist you in identifying your priority debts. They can also help you deal with debts as a whole. They will check if you are entitled to any extra income, such as tax credits or benefits, and will make sure that you are liable for the debt you are being asked to pay. Advisers can also help you to work out and negotiate repayment plans with your creditors and may act on your behalf. If you are required to go to court, they can help you prepare for your case and may be able to attend a hearing with you and in some cases represent you.
Should I consider a loan to repay my debts?
Television and newspapers are full of adverts for companies offering to help with your debt management by turning all your various loans into a single loan. They will usually only help with non-priority debts (see above). If this is the case, you will have to negotiate your priority debts yourself.
With these types of loans, your monthly repayments may be reduced but you may be repaying the debt for a much longer period of time, as approximately 10–15 per cent of each payment can be for commission payable to the company concerned. Some debt management companies charge a fee, which leaves a lot less money from your available income to pay the debts. Not all companies conduct in-depth interviews with their customers about income and expenditure. This may mean that you will be committed to keeping up unrealistic levels of payment. In this case it is more likely that you will miss a payment because they are not affordable.
Some companies are only interested in customers who own their own home, so that the home can be used as surety against the debts. In other words, the loan offered is a ‘secured loan’, which means that your home can be repossessed if you do not pay.
You may like the thought of having the many debts dealt with in one go, but think carefully about the pitfalls and try to weigh up whether it is worthwhile by making sure you are clear how much you will have paid back at the end of the lifetime of the proposed loan. Remember, these companies can do nothing with your creditors that you can't do yourself with the help of a specialist money adviser from one of the organisations below.
Further information
Advice on debt is available at www.nationaldebtline.co.uk
Citizens Advice provides further information at www.adviceguide.org.uk