Dealing with Debt

Debt is a problem which affects many people and has many causes, some of which may be outside the debtor’s control – redundancy, relationship breakdown, illness etc.

The sooner financial problems are tackled the better and letters from creditors should never be ignored. Tempting though it may be, burying one’s head in the sand and hoping everything will go away will only make matters worse.

Our CAB has a well-developed and comprehensive “assisted self-help” debt advice service which is available to everyone. Our aim is to enable clients to maximise income, calculate essential expenditure for every day living expenses and then use any available income to negotiate repayment arrangements with creditors.

Almost all agreements for credit are made by a legally binding contract. Whilst revised offers of payment made to creditors would be reasonable under the client’s present circumstances, creditors do not have to accept the revised offer and may take further action to collect and enforce the debt. If a revised payment is agreed, this may be recorded with credit reference agencies.

Ultimately a creditor is entitled to pursue a debt though the Courts. However, this is not as frightening as it may seem. Most cases, certainly in the first instance, are dealt with as a “paper exercise” and the debtor does not have to attend the Court. The Court, acting under guidelines from the Lord Chancellor, will normally expect a debtor to make repayments which are reasonable under his/her present circumstances.

The consequences of defaulting on various debts are explained further on in this leaflet.

Holding Letter

The first thing to do is to write to the people to whom you owe money (your creditors) asking them not to take any further action while you assess your financial position. This should give you a breathing space in which to sort things out. If you can send a typed letter so much the better. There is an example of the sort of holding letter you could write at the back of this leaflet.

Identify Your Priority Needs

Priority debts are more important because of what may happen if you do not pay them.

Make a list of your debts and sort them into priority and non-priority. For instance if you default on your rent or mortgage, you could lose your home.

The following list shows what can happen:

Priority Debts

Try to get into the habit of thinking of debts as either Priority or Non-Priority Debts. Priority debts should always be paid first because of what may happen if you default, even if this leaves insufficient money to pay the non-priority debts.

Non-Priority Debts

Failure to pay these debts may result in the creditor taking Court Action.

The creditor will write and tell you that you are in default and at this stage you can try and negotiate a payment arrangement. If this cannot be agreed, or you default on the rearranged payments, the creditor will then issue a Claim in the County Court. An unpaid Claim will usually result in a County Court Judgment. If the terms of the Judgment are not met, a creditor can take enforcement action. This could be Execution against Goods (Bailiffs), Attachment of Earnings, Garnishee Order, (money owed to the debtor by a third party can be ordered to be paid to the creditor), Charging Order (security of the debt against a debtor’s beneficial interest in an asset).

The Citizens Advice Bureau can give you a full explanation of these actions.

You may want to put some of the Non-Priority Debts into the list of Priority Debts because they relate to things which are particularly important to you, such as the telephone or a cooker you are buying on HP.

A financial statement is one way you can show a creditor or the Court that, under your particular circumstances, you are making the most reasonable offer possible to repay the debt. The stages in preparing a financial statement are explained below.

Work Out A Budget (Financial Statement)

The next thing to do is to work out a Budget to cover your essential expenditure including all your Priority Debts. There is an expenditure sheet at the back of this leaflet to help you to do this.

Break down all the figures to the same time period, weekly or monthly depending on whether your income is paid to you weekly or monthly. Try to estimate costs such as fuel and water costs spread evenly over the year.

Work out your Budget to include Essential Expenditure only. It should include payments for the priority debts which have been agreed with the creditors. For instance if you have rent arrears you must negotiate with your landlord an agreed weekly or monthly payment which includes the ongoing rent and a payment towards the arrears. The Budget should cover all of the priority debts.

Do not, at this stage, include any payments for the non-priority debts.

Total up the items in the Budget and subtract the total expenditure from your total income over the same period. The balance of income is what you can offer to the non-priority creditors. How to do this is explained in the paragraph headed "Your Possible Repayments".

If the total expenditure comes to more than your total income you need to go through the Budget again to find ways of reducing your expenditure at least to balance your income. You may also be able to find ways of increasing your income.

If you would like Horsham & District CAB to help you to do this we will ask you to complete Personal Budget Forms.

Ways Of Cutting Down Your Living Expenses

People have different needs and different views on what they consider important to spend money on, so one cannot give hard and fast rules on how to budget. You may like to consider the following suggestions.

Mortgage Discuss with the building society the possibility of reducing payments by extending the loan period or changing the type of mortgage.

Ways Of Increasing Your Income

• Income Support or Job Seekers Allowance - for people who are not working
• Working Families Tax Credit - if you have children and are working at least 16 hours/week
• Children’s Tax Credit – can be claimed from the Inland Revenue
• Housing benefit - help with the rent
• Council Tax Benefit - help with the council tax
• Disability Benefits
• Pensions Are you paying the right amount of tax?

We can check your benefits and tax for you at the Citizens Advice Bureau.

Could you or your partner do extra work in the evenings or at the week-ends? This may affect any benefit you are getting.

Could you take in a lodger or let rooms in your house? Is it allowed under your mortgage or tenancy agreement? This may also affect your benefit. If you are paying Income Tax you may be able to claim tax relief on rental income.

Your Possible Repayments

You have now worked out a Budget which covers your essential expenditure and includes regular payments to the priority debts which have been agreed with the creditors. Do make sure that the Budget covers all essential living expenses and, if feasible, include a small allowance for unexpected emergencies.

If the Budget shows a surplus of income over your essential expenditure, this surplus is what you can offer to your other creditors on a monthly instalment basis to pay off the non-priority debts.

The amount offered to each creditor should be proportional to the amount the creditor is owed. This is called a pro rata payment. This is calculated using the following formula:

When you have worked out the offer for each creditor, add up all the offers to check that the total equals the monthly surplus.

IF YOU FIND IT DIFFICULT TO DO THIS CALCULATION WE CAN HELP YOU TO DO IT AT THE CITIZENS ADVICE BUREAU

You can now prepare a Financial Statement to send to all your non-priority creditors summarising your income, and essential expenditure and listing all your debts. The statement also shows the offers you are making to all the creditors so that each creditor can see that the offer you are making to him is reasonable and fair. A specimen financial statement is included with this leaflet. We can also help you to prepare this at the Citizens Advice Bureau.

Send the Financial Statement to each non-priority creditor with a dated covering letter making the offer shown in the Statement and keep a copy of each letter you send. State in the letter that you will make an increased offer when your financial circumstances improve, and ask the creditor to suspend interest charges. A sample letter is given at the back of this leaflet.

If you have been paying towards any of your non-priority debts by bank standing order or direct debit arrangements, you will need to cancel or change these to fit in with your proposals.

What If There Is No Surplus?

In this case you should first check through the Budget again to make sure that all of the expenses you have included are reasonable and that there is no way that you can reduce your expenditure any further.

Then you can only make a Nominal Offer to your non-priority creditors. Prepare a Financial Statement as described in the last section summarising your income and essential expenditure, and listing all your non-priority debts. As there is no surplus you cannot work out a proportional offer.

Send the Financial Statement to each creditor with a letter making a nominal offer of what you think you can afford, say £1/month or 50p/month. The letter should state as before that when your financial circumstances improve you will write again with an improved offer, and you should ask the creditor to suspend interest charges. However, most creditors will only suspend interest charges when a reasonable offer to clear a debt has been made and accepted.

DO NOT BORROW MONEY TO PAY OFF DEBTS WITHOUT TAKING ADVICE

In general it is not advisable to borrow money to pay off debts, particularly if these are non-priority debts.

What Could Happen If Your Offer Is Refused?

If the debt relates to a Hire Purchase Agreement the creditors may repossess their property. They may be able to do this without a Court Order if less than one third of the total price has been paid.

If a creditor thinks you own valuable assets which could be realised to pay off the debt, such as your house or a car, they could try to make you bankrupt. In this case you will probably receive a document headed "Statutory Demand". This is a very drastic step which could have serious consequences for you and your family, particularly if you own your own home.

If you are taken to court, court fees and solicitors' costs will be added to the debt. If the court makes an order for you to pay the debt your name will appear in the Register of County Court Judgements, unless the whole debt is settled at once, and this can affect your credit rating. So try to avoid being taken to court if possible.

Please show items of expenditure as weekly or monthly.

FINANCIAL STATEMENT

Name: Mr & Mrs A N Other and 1 child aged 6.

Address: 1 Railway Cottages, Anytown

HOLDING LETTER

Name and address of Creditor Your full name & address

Date:

Dear Sir,

Re: Account No:

I refer to your letter dated ……………………. concerning the above account.

I have a number of financial commitments which I am having difficulty in meeting. I have therefore consulted the Citizens Advice Bureau in Horsham and they are helping me to assess my situation by drawing up a financial statement. Meanwhile please let me know the outstanding amount owing on this account.

I hope to be able to write to you again in the near future with a copy of my financial statement with a firm proposal for dealing with the debt. In the meantime I would be grateful if you would defer any action to recover the amount owing and suspend interest charges to prevent the debt increasing.

Thank you for your help.

LETTER ENCLOSING FINANCIAL STATEMENT

Name and address of Creditor Your full name & address

Date:

Dear Sir

Re: Account No.

I refer to my letter to you dated .....................

I now enclose a financial statement setting out my income and essential expenditure on a monthly basis, and including a repayment proposal showing how my available income is to be offered to my creditors on a pro rata basis. This has been prepared with the assistance of the Citizens Advice Bureau in Horsham.

While I appreciate that the offer made is small, I believe it is realistic in the circumstances and I hope you will be able to accept it. If my financial circumstances improve I will write to you again with an increased offer.

I request that you stop the interest accruing on this account in order that my payments will begin to reduce the debt. I enclose my first payment of £……….. and look forward to receiving a receipt. (I would be grateful if you ould send me a payment book in order that I may make future payments at the Post Office.)

I look forward to receiving your agreement to my proposal.

Talk To Us If you have difficulty in producing your financial statement or in dealing with creditors, please come ack to the Bureau for further advice, bringing all the relevant papers. It often helps to talk over your roblems with someone else. Everything you tell us will be treated in strict confidence.