Money Matters: What you need to know about debt. What is debt?

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1 What is debt? Debt is a sum of money owed to another person or organization. A debt can be in the form of a: Bank loan Rent arrears Utility bill debts Over draft with bank account Failure to pay council tax Hire purchases Personal loans Unpaid phone and TV licence Pay day loans Money borrowed from loan sharks Child maintenance arrears Credit card Store card What types of debt are there? There are two types of debts you could have secured or unsecured debt. The principal of the debt is the same as you owe money to another person or organisation but the consequences attached to the debt vary. A secured debt is attached to an asset you have in your possession which can act as a security for the debt. Usually the lender will place a condition in the contract when lending the money stating if you fail to make the agreed payment on time the lender can take possession of you assets such as your house or car to recover the cost of the loan by selling your assets. Once the asset is sold but the recovered sum does not cover the outstanding balance the lender can then still pursue you for the difference until the outstanding balance is paid in full. Examples of secured loan mortgage, finance car. Whereas, unsecured debt does not give any right to the lender to gain any security for the debt. If you fall behind on your agreed payments the lender cannot take any of your property and sell it to recover the outstanding balance without a court order. However, the lender will still have the power to take some action by hiring a debt collector to encourage repayment of the debt. If this solution is unsuccessful then the lender does have the power to sue you and ask the court to withhold payment back from your wages to pay for the debt, take assets or to put a lien on your assets a right given to the creditor by the court to

2 secure a debt until you ve paid your debt off in full. Examples of unsecured loan credit card, student loans, payday loans and court-ordered child support. I don t know what type of debt I have? If you re not sure what type of debt you have, you should check the credit agreement you received when you first took the debt out. The credit agreement is the legal contract in which your lender arranges when loaning money to a customer for a specified amount of time. The credit agreement outlines all the rules and regulations associated with the contract. If you don t have the credit agreement you can ask your lender to provide you with a copy. They will be able to tell you what type of debt you have. Which debt should I Prioritizing first my Secured or Unsecured Debts? When decided what debt should be paid first it is important for you to look at what the consequence will be if you don t pay back the loan as soon as possible. Therefore, is it important you are able to prioritize your debts by working out which is a high priority debt and which is a least priority debt. Generally your secured debts will be classed as a high priority because if payment is not made you risk losing your property and other personal assets. However, during the repayment process it is important you try and keep up the minimum required installment payments on all secure and unsecure debts. Failure to cooperate to pay your debt will be reflected negatively on your credit check. I have tried repayment but I am still struggling, what are my options? Temporary payment arrangement Temporary payment arrangements are encouraged for people who have very little money to pay off their debts once they have deducted their living cost. A small payment towards your debt reflects a positive image demonstrating you re willing to pay off your debt and you re not ignoring the problem. Before deciding on what contribution you will be making towards your debt it is important you calculate your essential living cost such as your rent, food and utilities to ensure they are paid for first. Making an offer to your creditors may not be easy therefore, it is advisable you seek advice and support prior to contacting them. If your offer is accepted it is very important you try your best to ensure these payments are kept up to date to prevent yourself from falling into more debt.

3 Debt relief order A debt relief order is a form of insolvency when you can no longer meet your financial obligations with your lender when debts become due. This order can help people who are on a low income and cannot afford to pay back their debts become debt free. Debt relief order enables you to make a fresh start but whether you qualify for this order will depend on whether it can be shown your financial situation is very unlikely to improve in the near future. This is a legal process so it is important you contact a practitioner who has been authorized to make an order on your behalf. A list of approved organisations can be found on the following link When an application for a debt relief order is made it needs to be granted by the official receiver for it to be effective. Official Receiver will only consider your Debt Relief Order once the application fee of 90 has been paid in full. Once the order has been accepted it will prevent your creditors from contacting you for the purpose of demanding payment for a period of 12 months unless your financial circumstances improve. You are also placed on a restriction preventing you from taking credit over 500 without telling the lender you are on a Debt Relief Order first. Once the 12 month period is over and your financial position hasn t improved all your debts included in the debt relief order will be written off allowing you to make a clean start. There is a strict criteria to qualify for this order: Your current debt balances must not total more than 15,000 You cannot own assets worth more than 300 You must have no more than 50 left over each month after paying your household bills You cannot own a vehicle that is worth more than 1,000 You must not be subject to any current bankruptcy proceedings or have had a Debt Relief Order in the last six years. You must have lived, had a property or carried out business in England or Wales in the last three years. (Although this was in October 2013 the figures can vary so please make sure you are up to date with any changes)

4 However your application can be rejected if it can be shown that you have: Given away a property or sold it for less than it is worth in the last two years. Favoured any of your creditors by paying one more than others in the last two years It is important you include all of your debts into your application when making the order because if not mentioned you will still be liable for those debts. The types of debts that can be included in your Debt Relief Order: Rent, utilities, telephone and council tax Credit card debt, overdrafts and loans Benefit overpayments Hire purchase (HP) or conditional sale agreements Items bought on finance The total balances of your debts must include any interest that is being added on and any arrears. The Insolvency Service will reject your application if the interest takes the total amount of debt over the 15,000 limit. (Although this was in October 2013 the figures can vary so please make sure you are up to date with any changes) Individual voluntary arrangement An individual voluntary arrangement also is a form of insolvency involving a legal procedure for people in financial difficulty who has unsecured debts. Here again, it is important you seek legal advice. A list of practitioners in the Birmingham area can be found of this link To begin the process an insolvency practitioner will need to draft an individual voluntary agreement on your behalf once, they have assessed your financial position. The insolvency practitioner will then send a proposal to all your creditors explaining to them the monthly contribution you can afford to make once you have met your basic living cost. However, before an individual voluntary arrangement can be agreed meeting needs to take place with all your creditors present to discuss a possible agreement. During this meeting a vote will be made by the creditors whether they accept your proposed payment or not 75% of the creditors need to vote in your favour for the proposal to go ahead.

5 As soon as payment has been approved you will be expected to pay the agreed amount over an agreed period of time. During this period the creditors will not be able to take any legal action against you if regular payments are made. Once the agreed sum has been paid in full your remaining balance will then be written off. Your financial position will then be monitored yearly by the insolvency practitioner till the individual voluntary arrangement ends If you rent your home an individual voluntary arrangement doesn t usually affect your tenancy agreement but it is important you check your tenancy agreement and make sure it doesn t say that your tenancy will be affected if you go bankrupt Bankruptcy Bankruptcy is a form of insolvency which involves a legal process therefore, it is advisable you seek legal advice before petitioning for bankruptcy. To petition for bankruptcy your unsecure debts must be more than what your current assets are worth. Your assets will include your house, car, savings, antiques or electrical goods that you could sell to clear all your debts. It is important that you continue to make payments to creditors while you apply for bankruptcy. This shows that you are trying to resolve the situation and that you are not simply ignoring the problem. To begin the bankruptcy process you will have to apply to your local county court. To file for personal bankruptcy you must pay set fees during the petitioning process The fees are: 525 for managing your bankruptcy 175 for court costs, if you re on income support you may not have to pay this court staff can advise you (Although this was in October 2013 fees can vary so please make sure you are up to date with any changes) If the court agrees to your bankruptcy then most will grant it on the same day. This means that you are declared bankrupt straight away. If the court approves your bankruptcy creditors can no longer contact you or take legal action to recover any money you owe and your unsecured debts will be written off. However, there are restrictions which apply during the 12 month period of bankruptcy. During this period you will have to inform the official receiver if there are any changes to your financial circumstances. You

6 will not be able to obtain credit more than 500 without disclosing your status to the lender. You might also have to sell valuable assets, to help cover the cost to pay toward your debt but this will exclude your day-to-day living essentials assets. Your credit file will be severely affected and you will not be able to obtain credit for several years. If you are in rented accommodation, your landlord could be informed that you have gone bankrupt. Some tenancy agreements will not allow you to remain in the property if you go bankrupt. The record of your bankruptcy remains on the bankruptcy register for three months after the discharge. Therefore, it is important you take note of this when making your decision to proceed and always seek legal advice. Glossary Secured debt- A secured debt is attached to an asset you have in your possession which can act as a security for the debt. Unsecured debt- unsecured debt does not give any right to the lender to gain any security for the debt. If you fall behind of your agreed payments the lender cannot take any of your property and sell it to recover the outstanding balance without a court order Assets- property that you own which holds financial value Lender- Someone who makes funds available to another with the expectation that the funds will be repaid. Lien- The right to take and hold or sell the property of a debtor as security or payment for a debt Credit agreement- A legal contract in which your lender arranges when loaning money to a customer for a specified amount of time. The credit agreement outlines all the rules and regulations associated with the contract. This includes the interest that must be paid on the loan. Creditors A person /company money is owed to. Insolvency- When an individual can no longer meet its financial obligations with its lender or lenders as debts become due. Legal Practitioner- One whose profession is to give legal advice and assistance to clients and represent them in court or in other legal matters. Official receiver- independent impartial party appointed by the court to manager your property during the bankruptcy.

7 What is Pay Ahead Stay Ahead? Pay Ahead Stay Ahead is a 3 year programme to support young people aged in Birmingham who are either thinking about social housing tenancy, or are a new social housing tenant (up to 6 months in their first tenancy). The programme offers a wide range of services aimed at improving their personal financial management skills staying out of debt, away from loan sharks and beginning to save. The programme is funded by The Big lottery and led by Ashram housing association. Ashram is a West Midlands housing association that provides community-inspired housing and services and is an agency for social inclusion and social impact, developing person-centred services to meet people's needs, choices and aspiration. Interested? If you want further information on the Pay Ahead Stay Ahead or sign up to Pay Ahead Stay Ahead program, you can go to or you can phone up our hotline