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Last Updated: Monday, 16 July 2007, 14:47 GMT 15:47 UK
Sorting out borrowing problems
Are you in trouble over debt? Follow our step-by-step guide to sort out your finances.

The key to sorting out your borrowing problems is the three-step approach:

1. Work out the scale of the problem;
2. Draw up your budget; and
3. Don't let matters slide - get help if you need it.

You might feel you need help with all of this, and there are many sources of free help and advice available.

Contact any of the organisations mentioned below to seek help if you need it, and look at our guide on "getting help".

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STEP 1: WORK OUT THE SCALE OF THE PROBLEM

Make a list of all your borrowing - don't forget to include unpaid bills, loans from family and friends and money owed on credit cards.

Prioritise your debts

Think about which are priority debts and the most important to clear first.

The list below gives a general guide to the order of priority, but it may not be appropriate in every case. This is not a complete list and further advice should be sought.

You will need to think about your own particular circumstances, taking into account the severity of your debts, the steps already taken by the people you owe money to (your 'creditors'), the measures they can use to get their money back, and your ability to spread payments among your creditors.

Most creditors will agree to a monthly repayment to their arrears before they take any action, so it is important to deal with these debts as quickly as possible.

Below is an overview of the sorts of things that can happen if you don't pay your priority debts.

This is not a complete list and further advice should be sought.

  • Mortgage (and other loans secured against your home) or rent
  • Council tax
  • Gas and electricity
  • Water
  • Tax or VAT arrears
  • Business debts
  • Hire purchase
  • Magistrates' court fines
  • TV licence
  • Maintenance to support a former partner or children
  • Loans from family and friends
  • Social Fund Loans, benefit overpayments
  • Unlicensed lenders
  • Store cards, credit cards and personal loans

Ignoring any of these debts can have serious consequences.

STEP 2: DRAW UP YOUR BUDGET

Drawing up a realistic budget will help you work out how much you can afford to pay off each week or month to clear your debts.

Online budget calculators, like those on the FSA and National Debtline web sites, can help you do this.

Talk to all the people you owe money to as soon as the problem starts.

Suggest a plan to make whatever payments you can afford until your circumstances improve.

Make sure you talk to all your creditors regarding your

  • mortgage
  • other secured loans
  • rent
  • household bills
  • personal loans and credit cards
  • bills from mail order catalogues, and so on.

If you need help preparing a plan, see the links to debt advisers below.

for free confidential and independent advice on how to deal with debt problems

STEP 3: DON'T LET MATTERS SLIDE - GET HELP IF YOU NEED IT

You may want to get some personal advice on the best way to approach your creditors and organise your repayments.

This is readily available at no cost and there is no need to pay a debt management agency to sort out your problems.

Whatever you do, don't let matters slide.

Don't ignore any letters or court papers.

If you get letters from your creditors or a summons to attend a court hearing, don't ignore these.

DO stay in contact with your creditors - they are more likely to be able to help you if they understand your circumstances.

DON'T fail to attend court hearings - the court will have no opportunity to hear your side.

Some advice organisations will help you to prepare for a court hearing and in severe cases may even agree to represent you in court.

You may be tempted to go to a 'debt management company'.

These companies offer to sort out repaying your debts, but charge for their services. They can be expensive and free help is available elsewhere.

For example, the Consumer Credit Counselling Service (CCCS) and Payplan both offer free debt management advice.

  • Citizens Advice - an online CAB service that provides independent advice on your rights.

  • Citizens Advice Scotland - the website of the Scottish CAB service

  • Advice UK - the largest UK network of advice-providing organisations

  • Advice NI - for advice and agencies in Northern Ireland

  • National Debtline - for free confidential and independent advice on how to deal with debt problems

  • Business Debtline - for business debts

  • Money Advice Scotland - provides contact details for free, impartial, independent and confidential money advisers throughout Scotland

  • Consumer Credit Counselling Service - a charity dedicated to providing free, confidential counselling and money management assistance and advice on dealing with your creditors.

  • Payplan - Debt management and free confidential debt advice on resolving debt problems

    PRIORITY DEBTS AND THEIR CONSEQUENCES

    Think about which debts are the most important, and clear them first.

    Below is an overview of the sorts of things that can happen if you don't pay your priority debts.

    This is not a complete list and further advice should be sought.

  • Mortgage (and other loans secured against your home) or rent
    They will generally be your top priority as arrears can result in you losing your home.

    To avoid this you need to agree a payment arrangement with your lender or landlord. Landlords have different powers depending upon the type of tenancy you have.

    You should seek advice immediately.

    If you are evicted from your home due to rent or mortgage arrears, you may not always be re-housed by your local authority.

    Shelter can give advice on rent arrears:

    The website of the Financial Services Authority (FSA) has advice for people with mortgage trouble:

    Mortgage calculator

    (requires Acrobat reader)

  • Council tax
    If you don't pay your council tax, bailiffs may be called in, you could have an attachment of earnings or benefit made against you and, in extreme cases, you can be sent to prison or be made bankrupt.

  • Gas and electricity
    Arrears of gas and electricity can result in your supply being cut off, court action, and bailiffs.

    However according to their codes of practice, fuel companies should allow you to pay in instalments that you can afford.

    They may insist that you have a pre-payment meter to prevent disconnection. Some fuel companies have grant schemes that may be able to help if you are having financial difficulties.

  • Water
    Your water supply will not be cut off, but unpaid water bills can result in court action to recover the outstanding balance.

    However, all water companies have schemes that allow you to clear your water bills according to your ability to pay, particularly if you are on benefits.

    You should ask them for help if you think you might qualify. Some water companies have grant schemes.

  • Tax or VAT arrears
    There are procedures for negotiating with HM Revenue & Customs (HMRC) or challenging them over tax arrears. Contact your local tax office for information.

    The HMRC also has specialist tax offices and helplines which may be able to help with specific queries - see the HMRC website for a list.

    If you don't pay your income tax bailiffs may be used, you may be taken to court or made bankrupt.

  • Business debts
    If you are running your own business, some debts - eg with suppliers - will be a priority to keep you trading.

    Seek advice from Business Debtline on how to deal with these debts.

  • Hire purchase
    If you don't pay hire purchase debts, you can lose the goods concerned.

    If you have paid over one third of the full value, then the goods cannot be repossessed without a court order.

  • Magistrates' court fines
    If you don't pay your fines, bailiffs may be used, you could have an attachment of earnings or benefits made against you or you could be sent to prison.

  • TV licence
    You can be fined for non-payment. If you don't pay your fines, bailiffs may be used, you could have an attachment of earnings or benefits made against you or you could be sent to prison.

  • Maintenance to support a former partner or children
    If you don't pay your maintenance, bailiffs may be used, you could have an attachment of earnings or benefits made against you or you could be sent to prison.

  • Loans from family and friends
    These debts aren't strictly priority debts, but due to the personal nature of the lending it may be wise to treat them as such in some circumstances.

    Not paying them back may cause hardship, and loss of support from your family and friends when you most need it.

    So for debts to friends and family, talk to your lenders. Explain your current situation and see if you can come to a realistic and manageable arrangement.

  • Social Fund Loans, benefit overpayments
    These will be priority debts if you are still claiming certain benefits.

    These debts can be deducted directly from your benefit at a set amount. You may, in some circumstances, be able to get these deductions reduced.

  • Unlicensed lenders
    You may have borrowed money from an unlicensed lender (a 'loan shark').

    It is illegal to lend money without a licence so these people are acting outside the law.

    They charge a high rate of interest and will often use threats of violence to ensure repayment.

    These debts can be difficult to deal with informally and you should contact your local trading standards office, the police or an advice agency if you are experiencing problems with loan sharks.

  • Store cards, credit cards and personal loans
    Although these might not be considered 'priority debts' you would be pursued through the courts for non-payment.

    In addition, store and credit cards usually charge high interest rates so outstanding balances may increase rapidly.

    Try to avoid taking out or using these if you're already struggling.

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