Debt Series: #3 Different debt and what to do about it

Debt Series: #3 Different debt and what to do about it

If you're on top of your budget and you're aware of the help that's on offer, it's time to take a closer look at the different types of debt and how to deal with them.

Your aim is simple: negotiate an affordable repayment plan.

"Start talking to the people and companies you owe money to. Leverage all the help the government has provided and more if possible. The earlier you pick up the phone the better as it is in their interest to help you too. They usually have a team to help with a range of relief options and flexible payment terms to suit a range of circumstances."

Before you pick up the phone you'll need to work out two things: what you owe and what you can afford to repay.

There are two main categories of debt; priority debt and other debt.

It's a priority debt if:

  • You could lose your home, property, or access to services if you don't keep up with repayments
  • It's anything legal or to do with the government and you could go to prison

Dealing with priority debts

Once you have identified your priority debts, get going on resolving these first.

HMRC

"Money you owe to the government is your number one priority."

If you owe tax and are unable to pay HMRC you need to try and set up an affordable tax payment plan. Arranging a repayment plan depends on the amount you owe and whether you have online access to the government gateway:

Eligibility is also dependent on whether or not you have any other payment plans with HMRC.

The payment plan is designed to spread the cost of your latest Self Assessment bill. You can choose the amount you pay upfront and how much you pay each month. Interest is payable and currently charged at 2.60%.

If you’re self-employed

You can also delay your payment on account (which would ordinarily be due in July 2020) until 31 January 2021. Only delay if you really need to - if you've got the money, you should make the payment.

Rent and mortgage arrears

"Getting into arrears when it comes to your home is really worrying. If you don't act quickly and pay back what you owe, you can end up losing your home. Fortunately the government have announced some short term plans that help."

Here are the key steps to take:

  1. Firstly, speak to your mortgage provider or landlord and negotiate a repayment holiday or a new repayment plan.
  2. Check to see what benefits you are eligible for. If you are already receiving benefits, check to see if you are getting the right amount.
  3. Consider asking for a proportion of any benefits you get to be paid directly towards the arrears.

Selling and switching

Switching to a cheaper mortgage deal and selling the property are both options you need to consider when you are dealing with mortgage debt.

Both will be trickier to do right now, although virtual valuations are starting to make it easier. Either way, if you are thinking about it, we recommend you talk to a mortgage adviser first.

Other priority debt

These arise when you fall behind on bills that could result in you losing utility services or property (for example an electricity bill). They could also, in extreme circumstances, result in court proceedings (for example child maintenance and council tax).

These unpaid payments are called arrears. When you build up a balance that you owe, it attracts interest and non payment fees. If you do find yourself in this situation, pick up the phone and negotiate a repayment plan that you can afford.

Other Debt

Payday loans

"Because these loans attract such a high rate of interest, it's important to deal with them sooner rather than later. After you have sorted out all your priority debt these ones usually top the list of the other debts you need to deal with."

When you took out the loan you agreed the lender could collect regular repayments from your bank account on a set date. If you don’t have enough in your  account on the agreed date, the lender can try again and charge you for the late payment.

If you are you are having issues paying back the loan, the lender may offer you longer to pay. They can do this in one of two ways; extending the time to pay or rolling the loan over. A rollover results in a new agreement for the repayment of the original loan.

Warning

If there is a better alternative to using or extending these loans, take it. Extending or rolling over will result in you repaying even more money to the lender in interest and fees or other charges.

"As a rule, I recommend you avoid these types of loans. But if you do need to use them revisit the reason why. Was it just bad luck or could you have avoided it through better planning, for example, better budgeting or building an emergency fund."

Credit cards, store cards, online credit and catalogues

This type of debt is unsecured, which means they can not take anything away from you. It's not a criminal offence not to pay, but that doesn't mean that you won't end up in court.

You need to figure out which are the most expensive ones and pay those off first. Where you can, try to pay off more than the minimum to clear the debt faster.

The other trick is to reduce the rates by using balance transfers to a lower interest credit card. It won't reduce the debt, but it will reduce the amount you have to pay back in interest.

When all else fails, negotiating a repayment plan is your best option. Non payment of this debt will have an impact on your credit score so it's worth remembering, a deferred payment is better than a missed one.

Warning

Even if someone else has run up the debt, you'll be responsible for paying it. If you have given someone a card on your account, you will need to get them to stop spending too.

Friends and Family

"Repaying debt to family and friends is personal. There are no hard and fast rules here, this one is much more about you relationship and we can't advise you on that. The one thing I would say is be open an honest about your situation."

From a really practical point of view this debt does not affect your credit score and in many cases does not attract interest either.

If at all possible and with agreement, it would make sense to try and pay back your other debts first. That said, it doesn't mean it's not a priority. It depends on who you have borrowed it from and their own circumstances.

Help from friends and family

Your family and friends could also be a source of help. Nearly a third of people need financial help from their friends and family at some stage.  While it's not easy to ask, this is an important lifeline that can see you through difficult times.

If things don't go to plan

If you have offered to make repayments but it has been rejected it makes sense to follow these two simple steps:

  1. Keep records of your repayment offer including dates, times and the person you spoke to
  2. Save the amount you offered to pay into a separate account and don't spend it

This could help you if legal action is taken down the line.

A final thought

If you cannot afford to repay all of your debts and you still need help, Peter recommends talking to a debt specialist. Your first port of call should be one of the free advice options such as StepChange or Citizens Advice.

The final article is one we hope you'll never need: what happens as a last resort in dealing with debt.

As a final note: be kind to yourself. You've already taken an enormous step in facing up to your debt, and there is plenty of help out there. If you have any questions, please get in touch at support@multiply.ai.