Debt - In England

About this information

This information gives you basic advice about debt and simple guidelines for dealing with money problems. It is important not to panic about debt problems but also you shouldn't ignore them - they won't go away.

If you are worried about how to deal with your debts, there is free, confidential advice available.

Your local Citizens Advice Bureau can give you advice about debt problems. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

There are four steps you can follow to help you deal with your debts:

* Step One – make a list of your debts
* Step Two – work out your budget
* Step Three – sort out your priority debts
* Step Four – sort out your non-priority debts.

Step One - make a list of your debts

Before you can tackle a debt problem, you need to collect together information about your money affairs. Make a list of all the people and companies you owe people to (your creditors). You will need the following information for each debt:

* the name and address of the creditor
* the account or reference number
* the amount you owe.

It's a good idea to keep the latest letter or statement for each debt together in one place so that you can easily find them if you need them.

If you've received any court papers or letters that seem urgent, you may need to act quickly. If you are not sure from the papers what you should do next, get advice straight away from an experienced adviser.

Your local Citizens Advice Bureau can give you advice about a debt problem. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Once you've made a list of all your creditors, you need to work out which ones to deal with first. You need to deal with some debts first before others because the consequences of not paying these debts can be more serious than for other debts. The debts you deal with first are called 'priority debts'. The debts you deal with after your priority debts are called 'non-priority debts'.

Priority debts

Priority debts include:

* mortgage or rent arrears. If you don't pay these, you could lose your home
* fuel arrears. If you don't pay these, you can have your fuel supply disconnected
* council tax arrears. If you don't pay these, a court can use bailiffs to take your goods. If, after this, you still have arrears unpaid, you can be sent to prison
* court fines such as magistrates' court fines for traffic offences. If you don't pay these, the court can use bailiffs to take your goods. If, after this, you still have arrears unpaid, you can be sent to prison
* arrears of maintenance payable to an ex-partner or children. This includes Child Support you owe to the Child Support Agency. If you don't pay these, a court can use bailiffs to take your goods. If, after this, you still have arrears unpaid, you can be sent to prison
* income tax or VAT arrears. You can be sent to prison for non-payment of income tax or VAT.

Non-priority debts

Non-priority debts include:

* benefits overpayments
* credit debts such as overdrafts, loans, hire purchase, credit card accounts and catalogues
* student loans
* money borrowed from friends or family.

You can't be sent to prison for not paying non-priority debts. But if you don't make any offers to pay, without explaining why, your creditors may take you to court. If you still fail to pay when the court has ordered it, your creditors can take further action. For example, they can get another court order which allows them to send bailiffs round to take your property away. This will be sold to cover your debts.

For more information about the bailiffs in England and Wales, see Bailiffs in Credit and debt fact sheets.

Step Two - work out your budget

List all the income and expenses for your household. Be honest and make sure that the amounts are realistic.

Under income, include:

* wages or salaries for your partner and yourself. Put in your net earnings, that is, after deductions. This should be the amount you regularly receive. If the amounts are different each month, average them over three or six months
* any benefits you are paid, including Child Benefit and tax credits
* maintenance from an ex-partner for you or your children. Include any Child Support from the Child Support Agency
* contributions from other members of your family and any lodgers.

Think about the ways in which you might earn extra money or increase your income. You may be able to claim benefits or tax credits.

Under expenses, include:

* housekeeping. Include realistic amounts for what you spend on food, toiletries, school dinners and meals at work, cleaning materials, cigarettes, sweets, children's pocket money and pet food.
* housing costs. This should include mortgage or rent, a second mortgage or secured loan, buildings and contents insurance, service charges and life or endowment insurance cover attached to your mortgage
* council tax
* fuel and water charges
* telephone charges
* travel expenses. Include both public transport and the cost of running a car such as road tax, insurance, and maintenance
* insurance that is not part of your housing costs (see above)
* childcare costs
* TV licence and any TV rental costs
* clothes
* any other essential expenses, such as medical and dental expenses or support for an elderly relative
* money you should set aside for unexpected events and contingencies. This includes saving for things like the replacement of essential household goods when they break down.

When you've added up all the figures, you'll see if you have any money left over to pay your debts. You may even be able to see if you can make some savings. An advice agency can help you draw up a budget and help you increase your income if this is possible.

Your local Citizens Advice Bureau can help you draw up a budget and claim benefits and tax credits. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

In England and Wales, you can print off a budget sheet to help you draw up your budget. See Basic debt advice in Credit and debt fact sheets.

Step Three – sort out your priority debts

Don't ignore letters or phone calls from your priority creditors. Get in touch with them as early as possible and explain to them why you are in debt. If you phone, you should follow up the call with a letter, confirming what you said on the phone. Keep copies of any letters you write to them.

An advice agency such as your local Citizens Advice Bureau can help you write to your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

If your priority creditors are threatening to take court action or have started to take court action against you and you need a little time to sort out your finances, send them a holding letter explaining your problems. Say that you will contact them again within two or three weeks. Ask them not to take any further action during this time. For more about negotiating with your creditors, see under heading Negotiating with creditors.

When you have worked out how much you have left over after paying your expenses, contact each of your priority creditors and try to make an arrangement to pay back what you what you owe. For example, you may be able to pay an extra bit each month until the arrears are cleared. Or you may not have any extra money at the moment but know you will have a lump sum in three months' time which will clear the debt completely.

If you can't afford to pay anything to your priority creditors and your situation isn't likely to get better, the outcome may be very serious. Get advice straight away.

Your local Citizens Advice Bureau can give debt advice in these cases. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Step Four - sort out your non-priority debts

After dealing with your priority debts, you will need to work out how to deal with your non-priority debts. How you deal with your non-priority debts will depend on whether you have any money left over from dealing with your priority debts and paying for essential household expenses like housing costs and food.

If you have money to spare

If you have money to spare, you may have several options for dealing with your non-priority debts.

You should weigh up the advantages and disadvantages of each of these options carefully. Get as much information as you can before making a decision and don't sign anything until you are sure it is the best option for you. If you have any questions, get advice.

Your local Citizens Advice Bureau can help you with advice about your options. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

You may have the option of:

* make offers to creditors yourself – see under heading Making offers to creditors yourself
* asking a Debt Management Company to make offers for you – see under heading Debt management plans
* applying for a court order that allows you to pay only a proportion of the debt. This is called an Administration Order – see under heading Administration Orders
* arranging a legal agreement with your creditors. This is called an Individual Voluntary Arrangement (IVA) – see under heading Individual Voluntary Arrangements (IVAs)
* putting all your debts into one loan. This is called loan consolidation – see under heading Putting all your debts into one loan – consolidation

If you have no money to spare

If you have little or no money left after you have done your budget, you have nothing of value to sell and you think your circumstances are unlikely to get better soon, you will have limited options for dealing with your non-priority debts. The options you will have are:

* asking your creditors to write off your debt – see under heading Asking to write off your debt
* applying for bankruptcy – see under heading Bankruptcy.

Making offers to creditors yourself

Any money you have left over after paying your expenses and your priority creditors is called your available income. You can use this to pay off your non-priority creditors.

You should share out your available income fairly between all your non-priority creditors. This means you should offer each creditor a percentage of your available income, based on the amount you owe them. These offers are called pro-rata offers.

To work out your pro-rata offers, first of all multiply each individual debt by your available income. Then divide this sum by the total amount you owe to all of your non-priority creditors.
(Yellow box starts)

Example:

You have total debts of £15,000. You have available income of £200 a month. You owe £10,000 to credit card company A and £5,000 to credit card company B.

Credit company A

Multiply £10,000 (debt to company A) by £200 (your available income). This equals £2,000,000. Divide this by £15,000 (your total debt). This gives you the sum of £133 per month to offer to company A.

Credit company B

Multiply £5,000 (debt to company B) by £200 (your available income). This equals £1,000,000. Divide this by £15,000 (your total debt). This gives you the sum of £66 per month to offer company B.

(Yellow box ends)

This is the system used by the courts for working out what you can reasonably afford to pay and it is accepted by most creditors.

You will need to write to each creditor. Send them a copy of your personal budget and a list of your other creditors to show them how you have worked out your offers. Make sure you keep a copy of everything you send to your creditors.

Creditors don't have to accept your offers but usually they will accept them if the amount you offer is fair. Creditors often want to look at your offer again after a fixed time, for example six months, to see if your situation has improved.

If creditors don't agree your offer and you can't persuade them, they may take further action.

For more about negotiating with your creditors, see under the heading Negotiating with creditors.

If you need more help making offers to creditors, you should get advice from an experienced adviser.

Your local Citizens Advice Bureau can help you negotiate with your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Debt management plans

If you have enough money left over after paying your priority creditors and essential expenses, you may be able to arrange a debt management plan.

A debt management plan is an arrangement with your creditors to pay back the debt by regular instalments. Instead of you speaking to your creditors yourself to arrange the plan, a Debt Management Company (DMC) does it for you. Usually you have to pay for this service although there are some DMCs who will do this for free.

The advantages of using a DMC are that:

* you make only one payment direct to the DMC. They divide the payment fairly between all your creditors
* you don't have to contact your creditors yourself, the DMC will do this for you.

However there are also disadvantages to using a DMC:

* most DMCs charge an upfront fee which can be quite high. This leaves you with less money to pay off your debts
* most DMCs also charge an administration fee to the customer each month. This leaves you with less money to pay off your debts
* some DMCs take all of the first month's payment as a fee. This puts your account into arrears by a month or more. These arrears will be recorded on your credit file (see under heading How debt affects your credit record)
* DMCs only deal with non-priority debts and you will have to deal with the more important priority debts yourself
* most DMCs do not give benefits advice or financial advice so you may lose out on important information about your finances
* if you own your home, the DMC may want to use it as security for the debts. This means that if you don't pay the arrears as agreed, you could lose your home.

If you do use a DMC, check the agreement carefully before signing anything. Check:

* whether you can cancel at any time if you are not happy with the service
* what the fees are
* whether you will get your fee back if you cancel
* which creditors the DMC will deal with and which creditors you still need to deal with.

If you are thinking about using a DMC, you should get advice from an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Administration Orders

If you have enough money left over after paying your priority creditors and essential expenses, you may be able to apply to the county court to have all your non-priority debts put together into one affordable monthly payment. This is called an Administration Order.

You can apply for an Administration Order if your total debts are less than £5,000 and you have a county court judgment (CCJ) against you. The court decides what is a fair amount depending on your income. The court can agree that you only pay part of the total debt. This is called a composition order.

Once the order is agreed by the court, you make one regular payment to the court and your creditors can't take any further action to get the money back, as long as you keep to the payments.

You can get an Administration Order application form from your local county court. You don't have to pay a fee to apply for an Administration Order. The court will take off an administration fee every time you make a payment.

If you are thinking about applying for an Administration Order, you should get advice from an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Individual Voluntary Arrangements (IVAs)

If you have enough money left over after paying your priority creditors and essential expenses, you may be able to arrange an Individual Voluntary Arrangement (IVA).

An IVA is a legal agreement with creditors (usually non-priority creditors) to repay your debts. This could either be in part or in full. The arrangement is negotiated, written up and checked regularly by an independent solicitor or accountant called an Insolvency Practitioner. Not all the creditors have to agree to an IVA as long as the creditors to whom you owe 75% of your debt agree. (Yellow box starts)

Example:

You have a total of £100,000 debt. You have three creditors:

Creditor A (£6,000)
Creditor B (£70,000)
Creditor C (£20,000)

Creditor C doesn't agree to an IVA but it doesn't matter because Creditors A and B do agree and between them, they have more than 75% of the debt. Creditor C still has to keep to the terms of the IVA. (Yellow box ends)

The costs of setting up an IVA can be high and you may have to pay an upfront fee. If you don't keep to the payments, you can be made bankrupt.

If you are thinking that an IVA may be an option for you, you should get advice from an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Putting all your debts into one loan – consolidation

If you have enough money left over after paying your priority creditors and your essential expenses, you could think about taking out a loan to pay off your non-priority debts. This is called a consolidation loan . You can use a consolidation loan to pay off things like credit card debts and loans.

It's usually not a good idea to borrow more money to repay your existing debts as this can make things worse and cost more in the long-run. Many creditors ask for the new loan to be secured against your home. This means you could lose your home if you don't keep up the payments.

However, if you can afford the repayments, have stable finances and are good at controlling your spending, this could be an option for you.

If you are thinking of borrowing to pay off your debts:

* make sure you have enough money left in your budget to afford the repayments
* check you can afford the repayments for the whole life of the loan
* shop around for the best deals
* don't borrow more than you need
* if you get a consolidation loan to pay off your credit card loan, make sure you close the credit card account and don't use your card anymore.

If you do take out a consolidation loan, be careful you don't end up with more debt than you started with.

Always get advice from an independent financial adviser before signing a new loan agreement. Make sure that the financial adviser is regulated by the Financial Services Authority (FSA). You can check this by looking on the FSA website at www.moneymadeclear.fsa.gov.uk.

Asking to write off your debt

In exceptional circumstances, your creditors may agree to write off your debt or stop action altogether. This is most likely to happen if you have a low income and your situation is particularly difficult and unlikely to get better. For example, you may have long-term serious health problems or be very elderly.

You will usually need to show proof of your situation, for example, medical evidence, before creditors will agree. If creditors do agree, ask them to put this in writing.

Some creditors may want an adviser to make this request on your behalf. Your local Citizens Advice Bureau can make the request on your behalf. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Bankruptcy

If you have no money left over in your budget, or you have so little that it will take many years for you to re-pay your debts, you may want to look at bankruptcy as an option.

Going bankrupt can take the pressure of creditors away from you. You are allowed to keep certain things, like household goods and a reasonable amount to live on. When the bankruptcy order is over, you can make a fresh start and the money you owe is usually written off. In many cases, this can be after only one year. Creditors have to stop most types of court action to get their money back following a bankruptcy order (but in some cases the bailiffs may still be able to take your belongings away).

However, there are disadvantages to going bankrupt, for example:

* it will cost you money (up to £485) to go bankrupt
* if you own your own home, it will usually have to be sold
* some of your possessions might have to be sold, for example, you will usually lose your car and any luxury items you own
* if you own a business, it is more than likely that your business will be closed down and your employees sacked
* you can't keep your bankruptcy private. A list of bankrupt people is published on the internet and your case could also be published in your local newspaper
* even when you are no longer bankrupt, you could have another order, called a bankruptcy restrictions order made against you. These orders can be made if, for example, you took on debts knowing that you had no hope of paying them back. A bankruptcy restrictions order can last for 15 years and will make your financial affairs very restricted
* even when you are no longer bankrupt, there are some debts such as court fines and student loans that will never be written off.

For more information about bankruptcy in England and Wales, see Bankruptcy in Credit and debt fact sheets.

If you are thinking about going bankrupt, you should get advice from an experienced adviser. Your local Citizens Advice Bureau can give advice about bankruptcy. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Negotiating with creditors

You are allowed to negotiate with your creditors and most creditors will consider any reasonable request or offer of repayment that you make. Sometimes, you need to contact creditors several times before they will agree to what you are asking.

What you ask your creditors for will depend on:

* what debts you have
* whether you have money left over to offer
* whether you have belongings worth selling to pay some or all of the debt off
* whether or not your situation is likely to get better.

It's important that creditors can see that what you are asking for is reasonable in the circumstances. So make sure you:

* are clear about what you are asking for
* always ask to freeze interest. Unless they freeze interest, your debt will carry on growing even if you are making regular payments
* tell them what the regular payment intervals you are able to offer, that is, whether you can pay monthly or weekly
* explain your situation fully. If you have priority debts, explain to non-priority creditors that you have to pay off priority debts first and say what you are offering to each of your priority creditors
* show evidence to support your request or offer of payment, for example, medical evidence if you can't pay your debts because of illness
* mention any changes that you know are going to happen which will affect your ability to pay or the amount you are offering.
* Be prepared to contact your creditors more than once.

Keep copies of all your letters to creditors and their replies and a note of any phone calls with them, in case you need them later.

Don't be tempted to offer more than you have if creditors are difficult. If you can't get the creditors to agree after a few tries, get help from an adviser.

Your local Citizens Advice Bureau can help you negotiate with your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Even if you believe that you have sent all the information to your creditors that they need, you will sometimes find that creditors will not accept your offers at first. Creditors may try to find reasons to pressurise you into paying more than you can afford. Or one creditor may ask you to pay more than you are paying other creditors. If you find this is happening, you should get advice.

Your local Citizens Advice Bureau can help you negotiate with your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Creditors may challenge your budget and claim that you can afford to pay more than you are offering. In these cases, you will have to be prepared to provide proof of your income such as wage slips and benefits details, and proof of your spending, such as copies of fuel bills and details of rent payments or mortgage payments.

If you are not confident about negotiating with your creditors, or you are finding it difficult to negotiate with them, you should get advice.

Your local Citizens Advice Bureau can help you negotiate with your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

If creditors do not reply to your offers, start paying them what you can afford anyway, and get advice.

Your local Citizens Advice Bureau can help you negotiate with your creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

If a creditor is using a debt collector to collect money, there is Office of Fair Trading (OFT) guidance that they must follow. If debt collectors don't follow this guidance, for example, if they are intimidating or pretend to have more legal powers than they really have, the OFT can take action against them. You can find out more about the guidance at www.oft.gov.uk.

If you're being harassed by your creditors, get advice about what to do.

Your local Citizens Advice Bureau can help you if you are being harassed by creditors. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Even if an advice agency or Debt Management Company is involved in negotiating with your creditors, this does not guarantee a favourable outcome. And even if creditors agree to a payment plan and even if you keep to the plan, this does not prevent them taking court action against you. It is therefore very important that you don't ignore any letters from your creditors even if you believe that an agreement has been reached. Make sure that your adviser or DMC sees any letters that the creditor sends to you at home. And if a creditor seems to be going back on an agreement, get advice straight away.

Your local Citizens Advice Bureau can help you if a creditor takes action against you even if there is an agreement for you to pay off your arrears by instalments. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

How debt affects your credit record

You need to be aware that some of the options to deal with your debts will affect your credit record. This will mean that it will be more difficult for you to get credit in the future, including a mortgage or even getting a new mobile phone contract.

This is because information about your financial situation is collected and stored on file by credit reference agencies. They give this information to lenders like banks, building societies, finance houses and major retailers. The lender uses this information to help them decide whether or not to give you credit.

Information held by credit reference agencies includes:

* your credit agreements, including balances and payment histories
* failure to pay your mortgage
* whether you have had your home taken back (repossessed)
* county court money judgments (CCJs)
* bankruptcy orders
* Individual Voluntary Arrangements (IVAs)
* previous credit searches
* Administration Orders.

You can check your credit file to make sure it is correct.

For more information on credit reference agencies, see Being refused credit in Credit. In England and Wales, see also How county court judgments affect your credit rating in Credit and debt fact sheets.

Further help

If you are having difficulties in dealing with debt problems, you should get specialist advice. Before seeing an adviser about debt, gather together all your financial papers. These should include:

* court papers and letters
* bills
* credit agreements
* your budget and your partner's budget.

If you have to wait for an appointment with an adviser, it may be useful to tell creditors that you have contacted an adviser for help. Most creditors welcome the involvement of a specialist adviser. They may be willing to hold off action so that an agreement to be reached.

Citizens Advice Bureaux

Citizens Advice Bureaux offer advice about debt problems. If it's a very complicated case, they will usually be able to refer you to a money advice specialist.

To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Money advice centres and law centres

Help with debt problems is available through Money Advice Centres or Law Centres.

The addresses and telephone numbers of Money Advice Centres and Law Centres can be found in the telephone directory. Or you can look on the CLS website at www.clsdirect.org.uk.

The website of the Law Centres Federation can also help you to find your nearest law centre. Go to www.lawcentres.org.uk.

National Debtline

The National Debtline can give free information to people living in England and Wales. It also provides an information pack on dealing with debt. The line is available on Monday to Friday 9.00 to 9.00 and on Saturday 9.30. to 1.00. The National Debtline telephone number is 0808 808 4000 and the website is www.nationaldebtline.co.uk .

Business Debtline