Dealing With Your Debts

Dealing With Your Debts A step by step guide to taking control of your finances

Contents 1. Dealing with debt. Introduction 2. Things to do first 3. Step 1. Completing the financial statement. Income 4. Step 2. Completing the financial statement. Essential household expenditure 5. Priority debts Mortgage Rent Water Council Tax Gas/Electricity Magistrates Court Fines Maintenance/ CSA Hire Purchase 6. Step 3. Non Priority Debts 7. Making offers to creditors 8. Negotiating with creditors 9. If your offer is refused 10. Implications 11. Warnings 12. Court Action 13. Bankruptcy 14. Sample Creditor letter 15. Financial Statement

Dealing with your debts When debts start to build up, there are steps which you can take to re-establish control over your finances. You have made a good start by seeking advice Money worries will not go away if you ignore them. The vast majority of situations are retrievable. The procedure outlined in our pack will assist you in drawing up a realistic budget. It will explain how to negotiate affordable debt repayments to your creditors. Things to do first 1: Note your income from all sources 2: Calculate your essential monthly expenses 3: Make a list of credit debts including credit cards/store cards, loans and catalogues 4: Consider making offers based on what you can afford 5: Prioritise debts that need to be dealt with immediately

Completing the financial statement - Income You will find a blank statement at the end of the pack. We suggest you make a copy and keep this as a blank master copy for future use. Note your net monthly income after tax and other deductions (i.e. the amount paid into your bank account). Overtime payments and other allowances should only be included if you can rely on receiving them every month. Include any regular benefit payments including tax credits, child benefit, maintenance payments for any children, contributions to your household expenses and any other source of income. Calculate your income on a calendar monthly basis (weekly x 52 divided by 12) Include your spouse or partner s net income if you run the household jointly. If you share a household with friends or live with your parents, list your income only and include your share of the rent and bills in the expenditure section. Could you look for ways to increase your income? Take on some evening or weekend work Increase the household contribution from adult children or lodgers Increase maintenance from the absent parent, if applicable Take a lodger; rent can be tax free up to a certain level [but this could affect any benefits to which you may be entitled] Are you entitled to any of the following benefits? Working Tax Credit Child Tax Credit Single householder reduction in Council Tax if applicable Income Support/Housing Benefit/Council Tax Benefit/Disability benefits Ring us for more information about benefits you may be entitled to.

Completing The Financial Statement - Essential Household Expenditure Calculate calendar monthly figures for each item on this section of the financial statement. Multiply weekly figures by 52 and divide by 12 to arrive at monthly figures. For guidance the following are figures that are generally accepted as expenditure figures: 35-45 a week ( 150-195 a month) for food and toiletries (housekeeping) for one adult 60-75 per week ( 260-325 a month) for a couple 20 to 35 a week ( 86 to 150 a month) for each child you have living with you (the amount that is seen as acceptable increases with their age) 3-5 per person per week for clothing more if you have a disability or illness causing extra clothing needs Secured loans are loans which have been secured against the value of any property. Under travel expenses you can include insurance, vehicle excise duty (road tax), MOT, servicing, breakdown cover and petrol, all spread over 12 months. However, you cannot claim for the cost of depreciation. Insurance covers buildings policies, house contents and any life assurance not attached to your mortgage. You can include the cost of dental insurance and treatment, replacement of glasses or contact lenses and prescription costs for you and members of your family, all spread over a year. You can also add essential work expenses such as equipment, clothing and professional subscriptions if you pay for these out of your own income. If you have borrowed from a friend or relative or someone has acted as guarantor for a loan, you may wish to include repayments in this list. However, other creditors may object. You will need to explain the reason you have to make such repayments. Available Income Subtract your total expenditure from total income the result will be your available income for creditors.

Priority Debts Ignoring priority arrears can lead to serious consequences. The diagram below illustrates some of the possible consequences of failing to keep up with payments. Mortgage/ Secured Loans/ Secured Loans/ Rent Rent Gas/ Electricity/ Telephone Repossession or Eviction Disconnection Council Tax/ Income Tax/ VAT Seizure of goods, attachment of earnings/ benefits/ imprisonment Hire Purchase arrears Repossession of Item Unpaid Court Fines/ Child Maintenance Imprisonment/ Bailiffs Mortgages/ Secured Loans Try to clear the arrears by spreading the outstanding amount over 1-3 years. If you have arrears of a secured loan that is covered by the Consumer Credit Act, you may be able to apply to the County Court for a Time Order to clear the arrears over a longer period. Contact us for further information on this Contact your lender if you are having difficulties. Do not delay. You may be able to negotiate one of the following arrangements: A mortgage holiday Extend the life of the mortgage Pay interest only if you are on benefits or a low income Change from an endowment to a capital repayment mortgage If you are in receipt of Income Support, Income Based Job Seekers or Pensions Credit you may be able to get help with your mortgage You could investigate re-mortgaging to reduce monthly payments check for any redemption penalty charges. [Remortgaging may affect future benefit claims] Take Independent financial advice before taking this step.

Rent Check whether you are entitled to housing benefit if you are on a low income. You can usually ask the local authority to pay housing benefit direct to your landlord. A tenant cannot be evicted for rent arrears without a court order. Council and housing association tenants are less likely to face eviction if arrears are reducing, even slightly, so make sure that you pay your current rent plus an amount towards arrears. If you are renting privately you should contact the landlord and offer to pay what you can afford send a copy of the financial statement so that the offer can be seen to be reasonable. Try to arrive at an agreement to pay arrears and make sure you pay as agreed. If you cannot reach an agreed arrangement, contact your Citizens Advice Bureau, housing rights centre or ring us for further advice. You can also get advice about housing matters from Shelter by telephoning 0808 800 4444 or visiting their website www.shelter.org.uk Water Water companies cannot cut off your supply if you do not pay the bill, but arrears should be treated as a priority and you should negotiate an agreed level of repayment. Council Tax This can be paid in 1 instalment or by 10 monthly payments. If you miss a payment, the whole amount becomes payable. Contact the Local Authority and make an arrangement to pay the arrears within the current tax year if possible. Contact us for further advice if you have a problem negotiating. Gas/ Electricity If you have arrears, contact your utility company and make an arrangement to clear the arrears. They should agree a reasonable arrangement to pay and take your circumstances into account. You could try to arrange the following: Payment of the arrears by instalments over 3, 6 or 12 months. Installation of a prepayment meter. Payment on a weekly basis Magistrates Court Fines You can ask the court if you can pay fines by instalments and complete a financial statement to show how much you can pay. If your circumstances change, go back to the court and ask to reduce the amount. You may wish to seek advice from the duty solicitor; there will be one available at court.

Maintenance/ CSA A court order for child maintenance payments can be varied if your circumstances alter. The CSA also has powers to amend maintenance payments contact them directly on 08457 133 133 HIre Purchase If you have paid less than one third of the HP price and fail to make further payments, the goods may be repossessed. If you have paid more than one third and then default, the lender will have to obtain a court order to repossess. The action you should take will depend on how much has already been paid and whether you wish to keep the goods. If you have paid at least half of the HP cost, you can return the goods and will owe no more. If you are in doubt you should seek advice from ourselves or your local Citizens Advice Bureau. details can be found in your local telephone directory or at www.citizensadvice.org.uk Note arrears of priority debts on your financial statement and the repayments you have arranged to pay.

Non Priority Debts Check Your Liability Only the person who signs the loan or credit card agreement is responsible for the debt. Couples are not liable for each other s non-priority debts unless they both signed the agreement. Only the main credit cardholder can be pursued for payment, even if purchases were made by a second cardholder. List Your Loan Benefits This section covers unsecured loans, credit card balances, store cards, catalogues and mail order accounts. You should obtain a current balance for each outstanding account if you do not have a recent statement. If you pool your finances with a spouse or partner, include their loans etc, as you will already have included their income and outgoings in the financial statement. You may need to check that the outstanding amount is correct, for instance that payments which you have made have not been overlooked. Bank Overdrafts You may have an overdraft which swallows up your wages every month (and the bank may levy high charges for the facility). You may wish to open a cash-only account with another bank or building society ask at a nearby branch - and have your wages redirected into it. You will be able to set up standing orders and direct debits and draw cash over the counter or from a cash machine provided the account is in credit. You can ask your existing bank to freeze your old account, and offer to pay off your overdraft along with other debts. A new bank will arrange for all your Standing Orders and Direct Debits to be transferred to the new account. You can find details of basic bank accounts at www.fsa.gov.uk/consumer It is important to get the timing right as your existing bank could withdraw your overdraft facility and refuse to meet essential payments if they think that you might be about to transfer your wages to another account.

Making Offers to Creditors Pro-rata Offers You need to work out how to distribute your remaining available income between your non-priority creditors so that the largest amount goes to the one to whom you owe most. This is called making pro rata or proportionate offers. To arrive at an offer figure divide the individual balance of one of the non-priority debts by the total of the non-priority debts and multiply by the amount of available income (you can work out your available income using the financial statement provide at the end of this pack). Once you have done this for all of your nonpriority debts check your figures, the total amount offered should equal your available income figure. Individual debt divided by total debt multiplied by available income = offer to creditor For example: If you have the following debt: 3000.00 Loan 1 2000.00 Loan 2 1000.00 Loan 3 6000.00 total debt Your available income is 200.00 a month Then you would offer: 100.00 to Loan 1 66.67 to Loan 2 33.33 to Loan 3

Negotiating With Creditors You should write to your creditors offering to pay the amount which you have calculated that you can afford. If your financial problems have arisen for a particular reason, such as relationship breakdown, ill health or bereavement, you may wish to mention this in the letter. It may also help if you say that you have received help from a debt adviser in calculating offers. You should ask each creditor to accept your offer and agree to review the payment after 3 or 6 months. You will find a sample letter at the end of this pack. Enclose a copy of your financial statement and ask each organisation to agree to freeze the interest on your account, so that your payment goes toward reducing the debt. If you can offer nothing at present, tell your creditors. You could offer a token payment of 1.00 per month in these circumstances. Your offer is likely to be accepted because each creditor can see that your offer is fair in relation to your means and all your other creditors. Without a financial statement, each creditor will try to pressurise you to pay them first. With the statement, they will see that you are offering what you can afford. You may wish to enclose a cheque for the monthly amount when you write with your offer this will show good faith on your part. You should then set up standing orders, from your new account if you have opened one. Your creditors will be more likely to accept your offer if you show a serious intention of keeping to a payment schedule. This applies even if you can offer only minimum payments of a pound, perhaps while you clear priority arrears. If you are claiming benefits or your income is very low, you could ask the creditor to consider writing off the debt, but they are unlikely to do this unless they feel you have no chance of ever repaying the debt. The other recourse open to your creditors would be to take you to court. The court has no power to imprison you for failing to keep up payments on non-priority debts. You might be ordered to make a monthly payment, but this would be based on your ability to pay. Should any creditors take court action, you could use your statement to make the offer you have worked out to the creditor. You are taking an active step which will make it much less likely that you will be taken to court the lenders are unlikely to go to unnecessary trouble and expense if they know that they will gain no more than you are offering them. However, if any creditor takes court action, ring us for further advice. If you receive a court claim form you have only 14 days in which to respond.

If Your Offer Is Refused Do not stop paying! Creditors are more likely to accept the offer if the first payment is sent with the financial statement as a sign of good faith. Write again to repeat that you cannot pay more / say that other creditors have accepted and agreed to freeze the interest and urge them to reconsider DO NOT be persuaded to pay more than you can afford, or you will not be able to pay your other bills. Ask to see the lender s code of practice and check that they are abiding by its terms. Remember that it is illegal for a creditor to harass you, for instance by phoning at unsocial hours or contacting your place of work Contact your local Trading Standards if this happens. You do not have to complete any form supplied by your creditor, as the standard financial statement provides all the necessary information. You may agree to supply copies of pay slips, household bills etc if asked, but you could point out that the courts would not insist on proof of all your bills. When your creditors contact you after an agreed period, you may be able to pay more send a new financial statement with revised offers. If your circumstances are the same, you will need to write to say so.

Implications Credit Rating & Credit Reference Agency Contacts There is no such thing as a credit blacklist but if you do not pay your debts you may find it difficult to get credit in future. Credit reference agencies keep records of your credit history. This information is kept on file for 6 years. Negotiating reduced payments to creditors is likely to be noted on your credit files and can affect your ability to get credit. To find out what information is held on you, you can write to any of the agencies below enclosing a payment of 2.00. The agency should send you information within seven days. Ring us if you would like further information. Experian Ltd Consumer Help Services PO Box 8000 Nottingham NG1 5GX Tel: 0870 241 6212 www.experian.co.uk Credit File Advice Centre PO Box 1140 Bradford BD1 5US Tel: 0870 010 0583 www.equifax.co.uk Call Credit Consumer Services Team Leeds LS1 5XX Tel: 0870 060 1414 www.callcredit.co.uk

Warnings DEBT MANAGEMENT COMPANIES Some commercial organisations offer to take over the management of your debts for a monthly fee. They will not do anything which you cannot do for yourself by following the advice in this pack and the fee could be better spent if you put it towards your debts. They do not always contact creditors even if they say they do. CREDIT REPAIR COMPANIES These companies charge a fee and often claim they can repair your credit rating. The advice they give is available free of charge. Contact us for more information.

Court Action If you fear that court action is imminent, phone or write to your creditor saying that you intend to make a pro rata offer as soon as possible, and ask them to delay taking any steps until you have contacted them again. Keep a note of letters and phone calls and always obtain the name of the person you dealt with. You can be sued in the county court for failure to pay a non-priority debt. You will receive a claim form, which will give you 14 days to respond with an offer of payment. Contact the CAB or your money adviser for help. The court will order you to make a payment according to your means, provided you have available income and have provided the information. If you do not disclose your financial details the court could order you to pay the whole amount, so it is in your interests to respond to requests for information. Failure to pay as ordered by the court may lead your creditor to ask for a warrant to seize goods, deduct the amount from your wages, or secure the debt against your property. In certain circumstances, the courts may grant an order entitling the creditor to gain access to a bank account to repay the debt. Most payments ordered by the court are paid direct from debtor to creditor and not through the court.

Bankruptcy If your debts are large and you have no means of repaying them in a reasonable period, you may want to consider bankruptcy. It is more likely to be an appropriate option if you have no assets. Bankruptcy has the advantage of removing the pressure of dealing with individual creditors. Once someone is bankrupt creditors must deal with the Official Receiver or Trustee. Bankruptcy can help you make a fresh start. Since the beginning of April 2004 the law on bankruptcy has changed. Most people will be discharged from bankruptcy after a year. However, income payment orders can last for 3 years. The court can also make a bankruptcy restriction order which can extend beyond discharge. You can obtain free guides to bankruptcy from the Insolvency Service website at www.insolvency.gov.uk or by telephoning 01530 272515. If you are considering bankruptcy, take advice first. Ring us for more information.

Individual Voluntary Arrangement (IVA) An IVA is an alternative to bankruptcy which may be appropriate where it would take you an unacceptable length of time to clear your debts by making pro rata payments. It is a formal arrangement through the courts, which is set up by an Insolvency Practitioner. A proposal will be made to repay your debts by offering regular monthly repayments over a time limited period or from a lump sum. An Insolvency Practitioner will generally give a free consultation to determine whether an IVA is an appropriate route. Fees for setting up and supervising an IVA can be high. However, some Insolvency Practitioners will receive payment from the monthly repayments into the IVA rather than charging a separate fee. Ring us for more information.

Sample Letter YOUR NAME AND ADDRESS] (DATE] [NAME AND ADDRESS OF CREDITOR] Dear Sir/Madam Account number I am writing with regard to the above account. I am unable to make payments as agreed (because). (I have a husband/wife/ partner and children include ages). The enclosed financial statement gives details of my income, household expenses and other debts. (These debts include debts to priority creditors). I would be grateful if you would accept a pro rata offer of as outlined on the statement and agree to freeze the interest on my account. (Enclose the first payment as a sign of good faith). OR I have no available income and would be grateful if you would accept a nil offer/minimum offer of 1 per month and agree to freeze the interest on my account. Please inform me if you agree to this request, and also agree to review the offer after 3 or 6 months. I look forward to your assistance. Yours faithfully [SIGNED]

Financial Statement Name Address Post Code Number in household Children s ages CLIENT EARNINGS-NET PARTNER S EARNINGS-NET INCOME SUPPORT CHILD BENEFIT TAX CREDITS OTHER BENEFITS OTHER TOTAL INCOME [A] EXPENDITURE HOUSEKEEPING CLOTHING MORTGAGE OTHER SECURED LOANS RENT BUILDINGS/CONTS INSURANCE LIFE ASSURANCE/ PENSION COUNCIL TAX WATER RATES ELECTRICITY GAS HP/ VEHICLE COURT FINES MAINTENANCE/CSA CHILDCARE COSTS TRAVEL COSTS TELEPHONE/MOBILE TV LICENCE/RENTAL HEALTH/ LEISURE SCHOOL/CHILDRENS EXPENSES OTHER OTHER OTHER OTHER PRIORITY DEBTS MORTGAGE ARREARS RENT ARREARS COUNCIL TAX ARREARS WATER RATES ARREARS ELECTRIC ARREARS GAS ARREARS FINE ARREARS MAINTENANCE/CSA H.P. ARREARS OTHER TOTAL PRIORITY [D] [C] LESS Arrears {C} -[D] LEAVES AVAILABLE INCOME FOR OTHER CREDITORS [E] OFFERS TO NON PRIORITY CREDITORS Creditor Balance X Monthly Pro Rata Offer Payment TOTAL EXPENIDTURE [B] [A] LESS [B] LEAVES TOTAL {Y} Pro rata formula Individual debt X divided by the total debt Y multiplied by the available income E equals the pro-rata offer] AVAILABLE INCOME [C]