Paying off your priority debts

Paying £1 to your creditors may keep them happy for a month or two, but it’s not going to work long-term.

You need to figure out how you are going to pay your debts off in full and get back into the clear.

Before you do anything, it is important that you take a careful look at your financial situation and work out how much you can afford to repay – and whether there is any way in which you can manage your finances differently to help you pay off more than you are doing at present. It’s also crucial that you communicate with your creditors and keep them informed of the situation throughout. You should also feel able to ask them for advice on how to settle the debt.

It is vital that you are maximising your income. For example could you work any more, maybe doing an evening job to earn a little extra? Do you have a spare room in your house which you could rent out? Are you claiming all the benefits you’re entitled to? All this extra income can be used towards settling your debts.

You also need to look at how you can minimise expenditure. By using simple budgeting skills and money saving tips like shopping with a list and sticking to it; steering clear of expensive brands; buying in bulk or by switching to cheaper utility providers, you can reduce your everyday expenses and put more money towards paying off your priority debts.

If you do require further help and advice go first to a free provider like Credit Action, the Consumer Credit Counselling Service, or Citizens’ Advice. They will be able to assist you and you won’t be charged for it.

One option is to take out a debt consolidation loan. Then you can deal with all your debts and pay back the loan over a longer period, meaning you will only have to make smaller, more achievable repayments. This will you help make your debts more manageable in the short term, although you will of course still have to pay off your consolidation loan which may mean that long term, you pay more.

If you do take this path, then be careful not to fall back into debt. A loan should be a one-off solution, not a quick fix that covers up an ongoing problem.

If you want to take out a loan, make sure you find the right one for you – one with a low APR. Use the uSwitch.com calculator to compare loans. We may be able to help you find one even if you have a poor credit history.

Compare loans now.

If you are turned down for a consolidation loan, or don’t want to take one out, there are several other options for dealing with an inability to make your payments. Here are your options:

• Declare bankruptcy - you may be able to write off your debts and make a fresh start when the bankruptcy is over (normally in one year). But you may lose your home and some possessions, like your car.
• Make reduced payments - you can come to a formal agreement with your creditors to settle your debt off by making reduced payments. This is called an Individual Voluntary Arrangement (IVA) and generally, after five years, your debt is classed as settled.
• Go to court - creditors may take action against you with a County Court Judgment (CCJ). The court will help you resolve the issue in a way that is fair to everyone, although the experience will affect your credit rating.
• Pay someone to help - for a fee, a debt management company (DMC) can consolidate your debts, so you just pay them and they distribute the money. DMCs normally only deal with cases regarding non-priority debts.
• Apply for a court order - if your debt is less than £5000, you can apply for an Administrative Order that covers your debts. You make a monthly payment to the court, which then distributes the money amongst your creditors and takes 10% of your payment as an administration fee. Please note a court judgment has to be entered against you before you can apply for an Administrative Order.