Credit debts include lots of different types of debts where the creditor hasn't got extra powers (for example, they cannot take your home).
This means they do not have to be treated as a priority. The most common credit debts include: credit-card debts; personal loans with finance companies; bank and building society loans, overdrafts and credit cards; charge cards; catalogues; personal debts to friends and family; doorstep-collected loans; credit sale agreements; and trading cheques or vouchers.
What are the options for dealing with your credit debts?
There are different options for dealing with your credit debts depending on your circumstances. We have outlined some of the main options below.
You need to be very careful when you decide what the best option is for you. This will depend on lots of factors such as your income, level of debts, assets and whether you own your home. Your credit rating will normally be affected whatever option you decide to take.
What if I have some money left to pay my creditors?
Pro-rata offers of payment
You can work out offers of payment based on a 'pro-rata distribution' of your available income. This means you offer all your creditors a fair share of what you can afford to pay. You also need to ask that any interest and charges are frozen.
You can then write to your creditors and ask them to accept your offer and freeze the interest. You may be able to do this through a free debt-management plan. See below.
Free debt-management plan (DMP)
Could you pay using a free DMP? This means you make one payment every month to cover all your credit debts. This will be divided up and sent to your creditors for you. You will not have to negotiate direct with your creditors to accept your offers and freeze the interest.
Contact National Debtline for advice. They may be able to help you set up a free DMP if:
- you have at least three credit debts;
- your money for credit debts is £100 a month or more;
- and you owe at least £5,000.
Bankruptcy
You may want to think about bankruptcy even if you have some money left to pay your creditors.
Individual voluntary arrangements
There is an alternative to bankruptcy called an individual voluntary arrangement (IVA).This is a formal arrangement through the county court to pay an agreed amount off your debts over a shorter period, such as five years. The rest are written off.
The IVA will be set up by an insolvency practitioner whose fees can be very high. Creditors can stop the IVA going ahead by voting against it.
It is usually only worth looking at if you have a lot of money available every month to pay your creditors or you have a lump sum or assets that you can include. You need to be careful if you own your own home as you may risk losing it.
Administration orders
When you have been taken to the county court, you might be able to apply for an administration order. This is a way of putting all your debts together and making one monthly payment into the court.
The court then shares it among your creditors. For some types of debt, you can only include arrears. The total of the debts must be no more than £5,000. Your creditors then can't take any further action against you if you have an administration order.
You can get the application form (form N92) from your local county-court office. You may need help in filling in the application form as local courts deal with administration orders differently.
Can I offer a lump sum to clear my debts?
If you have a lump sum that is less than the full balance you owe on your debts, you can ask your creditors to accept a lump-sum payment and write off the rest of the debts. You may be able to do this because you have come into some money or have some savings you can use. Creditors do not have to accept an offer in 'full and final settlement' but if your circumstances are unlikely to improve, they may agree to your offer.
'Consolidating your debts' into a new loan
You need to think very carefully before deciding to add all your debts together and pay them off with a new loan.
This may not be the best option for you, especially if your lender wants to secure the loan on your home. This means you could have your home repossessed if you do not keep up with the payments.
What if I have no money left to pay my creditors?
No payments or token payments
After paying your outgoings and making arrangements to pay your priority debts, there may be nothing left to pay other creditors.
If you have nothing left, say so. Show your creditors by sending them your personal budget and a letter to back this up. Ask your creditors to hold action until your circumstances improve.
This is called asking for a 'moratorium'. Or offer a token payment of £1 a month to each creditor instead.
Bankruptcy
Bankruptcy is really a last resort and most creditors are unlikely to make you bankrupt. You must owe £750 or more to that creditor before they can make you bankrupt. It costs them money in court fees and they are unlikely to get the debt paid back to them unless you have assets that can be sold to pay your debts.
The aim of bankruptcy is to claim assets that can go towards paying off your creditors. Once you are bankrupt, your creditors can usually take no further action against you.
You can make yourself bankrupt but the fees are high. Going bankrupt can have important consequences, particularly if you own your home and it is worth more than your mortgage. Your home could be sold as an asset.
Bankruptcy can be a solution if you owe a lot of money, have no assets, and can see no way of ever paying the debts off.
There are new bankruptcy rules (from April 2004) under the Enterprise Act. You are made bankrupt normally for up to one year. Usually debts that have not been paid are then written off and you are 'discharged' from the bankruptcy. You may still have to make monthly payments for a total of three years under the terms of your bankruptcy order.
If a creditor has threatened to make you bankrupt or you think it may be an option for you to consider, contact us for advice. For a fact sheet on bankruptcy, call National Debtline on 0808 808 4000.
Will my creditors write off my debts?
If you have no money for creditors and no assets, creditors may agree to write off your debts.
Creditors only rarely agree to do this but it may be an option if your circumstances are extremely difficult or distressing due to illness, age or a death in the family.
What if a creditor has already taken me to county court?
You should include this debt with your credit debts and work out the offer of payment in the same way.
If this is less than the amount the court has ordered you to pay, you may need to apply to the court to reduce the amount. This will mean you are treating all your creditors fairly and you are not paying one creditor more than you can afford.
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