Dealing with Debt - Wiseradviser



Module 3

Debt

Statistics

(The Money Charity Debt Statistics April 2014)

Objectives

▪ Consider the impact being in debt has

▪ How debt affects people

▪ Deciding which debts are the most important

▪ Ways to deal with different debts

Impact of debt

Debt

Not all debts are equally important. Owing £500 rent is more serious than owing £5,000 to the bank. Different debts are regulated by different laws, so creditors have different procedures and ways of recovering them.

Which debts are the most important is based on 2 factors:

1. What’s the worst the creditor can do? Different creditors have different options available to them.

2. Some debts are more important to people – some debts might be prioritised due to individual need. For example: a Hire Purchase agreement for a car may be a priority if you need the car for work or due to mobility needs. Alternatively, someone who doesn’t need the car and can’t afford to keep it might consider it to be a non-priority debt.

The most important debts are called ‘Priority debts’ as there can be serious consequences of not paying. Everything else is called ‘Non-Priority’.

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|Debt |Why is it important? |

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Priority debts are where the creditors have more powerful sanctions available such as:

- Disconnection, e.g. gas and electricity

- Court action that can lead to imprisonment

- Loss of home or other essential goods and services

The main priority debts are:

• Rent

• Mortgage

• Council Tax

• Gas & Electricity

• Fines

• Child Support

• Income Tax

• Water & Sewerage (although water companies can not disconnect the supply, the payments are ongoing and a large debt can build up very quickly so it’s treated as a priority)

• Benefit & Tax Credit overpayments

Everything else is a non-priority debt, including:

• Overdrafts

• Unsecured loans

• Store/Credit cards

• Catalogues

• Mobile phone bills

Ways to deal with different priority debts

o Rent arrears

If you have rent arrears the landlord can take you to court to evict you and you would be responsible for all the court and legal costs of doing this. However, eviction can usually be avoided if you are able to pay your normal rent plus an affordable amount towards the arrears. The amount you pay back will depend on your landlord and your own circumstances.

If it does go to court and the judge grants the eviction order you will usually be given 28 days to move out. If you don’t move out the landlord can apply for an eviction warrant and enforcement officers could visit. If your circumstances change you can apply to the court again, however, you will have to pay all the costs of this.

o Mortgage arrears

If you are more than 2 months behind on your mortgage payments the mortgage company can seek possession of the property. However, repossession can usually be avoided if you are able to pay your normal mortgage payment plus an affordable amount towards the arrears which would clear the arrears within the remaining mortgage term. Lenders may want this bound by a suspended possession order at the county court which will add further costs.

If it does go to court and the judge grants the eviction order you will usually be given 28 days to move out. If you don’t move out the mortgage company can apply for an eviction warrant and enforcement officers could visit. If your circumstances change you can apply to the court again, however, you will have to pay all the costs of this.

o Council tax

If you fall behind with your council tax payments the local authority will obtain a liability order from the magistrates court and you will have to pay the court costs. However, unless you contest liability you do not need to actually go to this hearing.

After the order has been made you may be able to negotiate a repayment arrangement with the council which could be a small deduction from a means-tested benefit like Income Support.

However, if an arrangement is not made quickly, the council are able to enforce the order through enforcement officers, an attachment to earnings, direct deductions from a relevant benefit, bankruptcy or, ultimately, a committal hearing at the magistrates’ court.

Although the magistrates have the power to send someone to prison for not paying their council tax, this is very rare. Before considering this the magistrates must be satisfied that there has been ‘wilful refusal’ or ‘culpable neglect’ – deliberately not paying.

At a committal hearing, the magistrates will look at your past and present financial situation and why you haven’t paid. If they feel you are in financial hardship they may write off some of the arrears and set up an affordable payment arrangement. Prison is very much a last resort.

o Gas and Electricity

Energy companies are able to disconnect your gas and electricity for non-payment. However, energy companies will generally ask for a pre-payment meter to be installed and will take regular payments through the meter to clear the arrears. Those who receive a means-tested benefit could request that an amount to cover their ongoing usage plus a small amount to reduce arrears is deducted weekly from their benefit. You will always need up to date meter readings when setting up a payment arrangement to ensure you cover your ongoing usage as well as a small amount towards the arrears.

British Gas, EDF and NPower have charitable energy trusts that can help clear energy debt to give debtors a fresh start. The trusts can also be applied to for essential white goods (e.g. fridge freezer or a cooker) and insolvency fees. Talking Money has an Energy Advice Project are able to complete applications on your behalf and provide one to one advice on any aspect of your energy usage.

o Magistrates’ court fine

Non-payment of a court fine could result in an order to appear at another hearing or enforcement officers (bailiffs) could be instructed which would incur further costs. The magistrates’ court may seek an attachment to earnings or, if you receive certain benefits, the magistrates may seek direct deductions from benefit (usually £5.00 or £10.00 per week).

Ultimately you could be imprisoned for non-payment of fines. Please note that enforcement officers acting for magistrates’ court fines (only) have the power to force entry but this has rarely been used.

o Water & Sewerage

Although water companies can no longer cut off the supply, they can instruct debt collection agencies and register the debt on credit reference files. They can issue a county court claim for the money owed and enforce it in the normal way if it is not paid, including a summons to the court for a means hearing.

Water com panies have schemes to help people on a low income address their water arrears. For example Bristol Water has a Restart scheme which allows you to make affordable payments. As long as you keep to the payments they will write off a matching amount of the arrears at the end of the first year and the remaining amount at the end of the second year. Also, the Assist scheme can lower your ongoing bill. To access these schemes you will need to contact a debt adviser to help with the forms.

Non-priority debts

Non-priority debts include credit cards, catalogues, store cards and loans and the creditor is unable to do anything without a County Court Judgement (CCJ). If a creditor goes to court and successfully obtains a CCJ, you need to reply to the court paperwork which should mean an affordable payment arrangement is set up. As long as you keep up with these payments nothing else will happen.

However, if you miss these payments, the CCJ can be enforced by enforcement officers, an attachment to earnings (money taken directly from your wages or benefits), a charging order if you own your house or if you have any savings the court can order the bank to freeze the account and pay any savings to a creditor (although this is very rare).

Non-priority creditors often use debt collection agencies. Although they do not have any additional legal powers, they can feel threatening with repeated letters, phone calls and visits (visits are from the debt collection agency and not enforcement officers/bailiffs).

If you have a debt to an energy company or landline from an old account, e.g. previous address but they are no longer your supplier, this is a non-priority debt as they are unable to cut off your supply.

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Options that deal with non-priority debts

Payment arrangement

Most typical credit debts are regulated by the Consumer Credit Act and therefore there are clearly defined restrictions on what the lender can do if you are not able to pay.

If you do not make the contractual payments on a credit agreement, the company will follow their standard arrears/recovery procedure. You will receive standard letters and reminders, possibly with charges, for some time before the company issues a ‘default notice’.

The default notice is a requirement under the Consumer Credit Act 1974 and gives you a last chance to pay arrears before the creditor demands full repayment of all that you owe. A default notice is usually registered on your credit reference file.

Please note that most creditors will not accept lower payments until their own recovery procedure has completed.

Following the demand for full payment, creditors will normally stop adding interest and charges and will transfer the account to a debt collection agency. An affordable payment can then be negotiated which will gradually reduce your debt. You should be realistic when making your agreement to repay and should not promise more than you can afford. It is much more likely that your offer will eventually be accepted than the creditor taking court action.

Free Debt Management Plan

If you have spare money after paying your normal living expenses and priority debts, you could pay your non-priority creditors through a debt management plan. There are only 2 independent companies in the UK that offer a FREE debt management service:

Stepchange 0800 138 1111

Or

Payplan (0800 716 239 - )

All the payments you make to them will go directly to paying off the debt that you owe. You will only need to make one payment per month, which the companies will distribute on your behalf. They will also deal with your creditors when they want reviews of your accounts.

Write Offs

If your financial circumstances are unlikely to improve for health or disability reasons you could ask your creditors to agree to write off your debts. They may agree if it is clear you cannot afford more than a token payment and you have no assets. You would need to provide a report from your GP or other health professional or support worker.

Full & Final Settlement

This is often made possible by someone (e.g. family member or a friend) who makes a lump sum available which is less then the full balance you owe on the debt(s). In return for having a lump sum payment the creditor agrees to write off the rest of the debt. Collection agencies will often offer such ‘discounts’ from time to time rather than accept very small payments over a long period.

Options that deal with both priority and non-priority debts

1 - Debt Relief Order

The Debt Relief Order is a new court order which is a form of insolvency but is different to bankruptcy. The fee to apply for this order is £90.00.

Applications to the Insolvency Service must be made through an ‘approved intermediary’ which will usually be an experienced debt adviser at a local advice centre.

The effect of a Debt Relief Order is to put a moratorium (a ‘hold’) on qualifying debts for 12 months. You do not need to make any payments and your creditors cannot take any action against them. At the end of the moratorium period these debts will be written off.

During the 12 months you must inform the Insolvency Service of any changes in circumstances and this may affect the Debt Relief Order.

Qualifying conditions are:

• Debts do not total more than £15,000 (increasing to £20,000 in October 2015)

• Available income after allowing for normal living expenses is under £50.00 per month

• You do not have any assets worth more than £300.00 (increasing to £1,000 in October 2015)

- One vehicle worth less than £1,000 is ignored

A Debt Relief Order will be registered on your credit file for six years. It will also be registered on the Individual Insolvency Register until 3 months after the moratorium period ends.

A Debt Relief Order can include Council Tax and other priority debts. It cannot include magistrates’ court fines, Student Loan Company debt, child support debt, social fund loans or debts incurred fraudulently. The law regarding rent arrears and Debt Relief Orders has recently changed and may change again so you are advised to seek specialist help to get the most up to date advice.

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2 - Bankruptcy

In bankruptcy, if the Official Receiver cannot pay creditors from any surplus income or assets, e.g. a house or car, (that is not essential for work) your debts will be written off.

You are automatically freed from bankruptcy after a maximum period of 12 months as long as you have kept to the restrictions imposed. You may not be able to continue using their normal bank account but it is possible to get a basic bank account.

During the bankruptcy period you are not able to obtain credit for over £500 without notifying the lender of your bankruptcy and any debts incurred after the bankruptcy date are not included. Whilst you are bankrupt you need to inform the Official Receiver of any change in circumstances, e.g. partner moves in/out, new job etc. If you have any excess income after essential expenditure the Official Receiver might ask you to pay a set amount each month towards your debts for 3 years.

The bankruptcy is registered on your credit file for 6 years and during this time will affect your ability to obtain mainstream credit. The bankruptcy will also be registered on the Insolvency Register.

The current cost of petitioning for bankruptcy is £705.00 made up of a bankruptcy deposit of £525.00 and a county court fee of £180.00. If you receive a means-tested benefit or are working on a low income you will need to fill out an EX160 form which might mean you don’t have to pay the court fees.

For further details of duties and responsibilities under bankruptcy please see the Insolvency Service’s ‘Guide to Bankruptcy’.

Bankruptcy includes Council Tax and other priority debts. However liability for magistrates’ court fines, Student Loan Company debt, child support debt and debt incurred through fraud remains after bankruptcy.

3 – Administration Order

If your debts are less than £5,000 and you have at least one County Court Judgement (CCJ) you can apply for an Administration Order. This enables you to pay your debts through one monthly payment to the county court. Payments are usually limited to three years so often only a percentage of the debts are paid off. The court will take a 10% fee from your payments to cover administration costs.

However, creditors can object to being included in the Order – the court would then call a hearing to discuss. This is a rarer option due to the relatively low upper debt limit and the requirement to have an outstanding CCJ.

An Administration Order can include Council Tax and other ‘priority’ debts. There is much local variation between county courts about what debts they will include and level of payment they will accept. It is best to refer to an adviser that knows local practice if this seems a likely option.

4 - Individual Voluntary Arrangement (IVA)

Although this is a form of insolvency it is different to bankruptcy and a Debt Relief Order. This is a legally binding arrangement where each creditor agrees to accept a percentage of how much they are owed. Usually you will make regular monthly payments over 5 years and an IVA must be drawn up by a licensed insolvency practitioner.

You need to have a reasonable amount of money available (and a stable situation) for an IVA to be viable as there are costs involved in setting up and reviewing it.

(This is the ‘little-known government legislation’ often referred to on TV advertisements.)

Credit Reference

Any default, late/missed payments or county court judgments on a credit account may be registered with credit reference agencies and will stay on the file for six years. Bankruptcies, IVAs, Debt Relief Orders and Administration Orders would also be registered.

This will probably mean that you will have difficulty obtaining mainstream credit in the future. After six years any entry will be removed from the file. It is possible to obtain a copy of the file and amend any entries that are incorrect.

See the enclosed factsheet from National Debtline for more information on credit reference agencies and reports.

Collection Agencies

Creditors often instruct collection agencies to collect unpaid debt. They also sell some debts to collection agencies. These agencies will demand full payment and may threaten county court action. Often their next letter will come from a firm of solicitors but this is still simply a demand for payment and does not necessarily mean court action will be taken.

Many collection agencies use the threat of county court action to try to extract higher payments, but are reluctant to actually issue county court claims if they are aware of your circumstances. This is because, if you comply with the court process, any payment order will be for an affordable amount – probably lower than the ‘minimum’ payments the collection agency is pressing for. Even if the collection agency does not know the circumstances they may still not take court action. Often debts are passed around a series of collection agencies without any of them taking the next step of issuing a county court claim.

If a creditor issues a county court claim and you admit that you owe the money, you do not have to attend a court hearing but should send back the appropriate reply form with an affordable offer of payment. If the creditor refuses the offer then the court will consider your circumstances and make an appropriate payment order. However costs will be added if county court action is taken.

If a claim is issued, and a county court judgment (CCJ) is made, the creditor can then take further action if you do not make payments.  Enforcement action could be:

1. An attachment of earnings order if the debtor is working.

2. A charging order to secure the debt on the debtor’s home if they own it.

3. Sending court enforcement officers to try to obtain goods.

4. Seeking payment from savings or investments, if any.

5. An order for the debtor to attend court to disclose assets and earnings.

Doorstep Collectors

Creditors frequently say that they may send a debt collector/field agent/local representative, etc to your home. They may or may not actually do so.

Doorstep collectors are not enforcement officers/bailiff. (Remember a enforcement officer can ONLY be instructed if there is already a county court judgment and you are not keeping to the terms set by the court.) A doorstep collector does not have any power to enter a home or remove goods. They can only ask for payment.

Enforcement officers/bailiffs

Many people are understandably worried that enforcement officers/bailiffs might come and remove goods from their home if they can’t pay a debt. People often worry when, in fact, it is impossible for an enforcement officer to call on them anyway.

This action is a way of enforcing a court order that is not being paid. It is important to know that you have rights and that there are strict guidelines laying down what enforcement officers can do and when.

The basic rule is:

An enforcement officer can ONLY call where you have broken the terms of some kind of court order. In the vast majority of cases if a creditor has not obtained a court order a enforcement officer CANNOT call.

(Remember, a letter that talks about or threatens court action doesn’t mean you actually have that court order yet)

A court order is likely to be:

• A county court judgment for a credit debt, debt to another person or tax debt

- a county court enforcement officer could call

• A liability order from the magistrates’ court for a council tax debt

- a private enforcement officer could call

• A magistrates’ court fine

- a private enforcement officer could call

• A county court order for an unpaid fixed penalty notice (parking ticket)

- a private enforcement officer could call

However, if there is a court order and the debtor is not paying what they should then an enforcement officer could call. However there are still rules about what the enforcement officer can then do.

The law changed on 6th April. The key changes are as follows:

• Enforcement officers can only call when you have broken the terms of some kind of court order

• If a creditor has not obtained a court order a enforcement officer cannot call

• They may consider a payment arrangement

• If the debt is passed to a enforcement officer you do not need to let them in

• They cannot force entry into a property unless they already have a Controlled Goods Agreement

• Only exception: enforcement officers recovering unpaid magistrates court fine – but in reality using force is rare

• Enforcement officers now called Enforcement Officers

• 7 days notice of an Enforcement Officer visiting

• First fee – Compliance Stage fee of £75 is added & binding effect on goods

• Cannot pay – Enforcement Officer will visit & Enforcement fees added

• Only entry through a door

• New qualification & certificate

• New offence – ‘Obstructing an Enforcement Officer’ but they still cannot force entry unless they have previously gained ‘peaceable entry’

• Enforcement Officers cannot take essential household items

• They can only attend between 6am – 9pm. They cannot enter if a child or vulnerable adult is alone in the property

• Levy is now Controlled Goods Agreement

Getting debt advice

There are many organisations offering free, independent debt advice. There is a mix of face to face appointments, telephone advice or online based advice. They will be able to discuss all your options with you and assist you if you choose any of the more formal insolvency options.

• Talking Money

• Citizen’s Advice Bureau

• National Debtline

• Payplan

• Setpchange

.uk gives a list of advice agencies in Bristol and surrounding areas.

Summary

▪ How to decide which debts are the most important and why

▪ The possible sanctions from different creditors

▪ Ways to deal with different debts

▪ Enforcement officers rights

▪ Credit Reference and Collection Agencies

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Outstanding personal debt stood at £1.439 trillion at the end of February 2014. This is up from £1.424 trillion at the end of February 2013

266 people are declared insolvent or bankrupt every day

79 properties are repossessed every day

Average household debt in the UK (excluding mortgages) was £6,018

Activity 1: What do people worry about when they are in debt?

Activity 2: Which debts are the most important and why?

Activity 3: How can you deal with debt?

Activity 4a

Maggie is a single parent living with 2 children in a privately rented flat. How can Maggie deal with these debts?

• Bristol Water debt £1,200, no court action taken

• Rent arrears with her current landlord £250, no action taken yet

• Magistrates Court fine £500 issued last week

Activity 4b:

Maggie has told you that she has about another £10,000 of debts, mostly made up of catalogues, store cards and doorstop lenders.

• What could Maggie do now?

• What would you need to consider?

Activity 5: How much do you know about enforcement officers/bailiffs? How do they differ from debt collection agents and loan sharks?

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