The truth about bankruptcy
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Knowing the difference between priority and non-priority debts can save you a whole lot of hassle in the long-run.
If you can’t afford to make all your debt repayments then it is really important to know which ones you should treat as top priority and which ones you don’t need to. And thinking that a non-priority debt is a priority one is a mistake: paying those first could make your situation worse.
What is a priority debt and what isn’t can be confusing – for example, it’s not the size of the debt that matters, it’s the type of debt that’s important. Similarly, just because a lender is contacting you a lot doesn’t mean that they are necessarily a priority for payment.
So what exactly are priority debts and why are they important?
Generally speaking priority debts are those than can have serious consequences if you don’t pay them. They include:
• Mortgage or rent
• Any loans secured against your home
• Income Tax, National Insurance and VAT
• Council Tax
• Gas and electricity bills
• Water rates
• Court fines
• Child maintenance payments
• Hire purchase loans (essential ones i.e. car to get to work or oven to cook food.)
• TV licence
To highlight what could happen if you don’t pay these debts, here are two examples. The first is your mortgage: if you don’t treat it as a priority for payment you are putting yourself at risk of losing your home. Another example of a serious outcome from not paying a priority debt is a possible jail sentence for not paying a court fine. So it’s the seriousness of the result of not paying – bankruptcy, repossession, court summonses and even a jail term – that makes them priority bills.
And what are non-priority debts?
These are the debts you should try to pay, but only once all your priority debts have been paid. They include:
• payday loans
• credit and store cards
• catalogue and doorstep loans
• bank or building society account overdrafts and loans
• personal loans
• money you’ve borrowed from friends and family
As you can see, these tend to be unsecured forms of credit. If you don’t make the payment on these debts, whilst you may accrue extra interest and charges and your arrears will build up, there are no direct consequences like losing your home or ending up in prison.
One other consequence of making payments late, paying in part or missing payments altogether on both priority and non-priority debts is that these will often show up on your credit history. This can have a serious effect on your chances of being accepted for credit in the future. So if you were to try to get a loan, credit card or even a mortgage, you may find it impossible or, at the very least, a lot more expensive than it would be if you had a great credit history.
If you can’t pay your debts
If you’re finding that you can’t afford to pay all your debts, maybe it’s time to sit down and have a good look at what’s coming in and what’s going out of your household each month. It may be that just a few tweaks here and there will make all the difference and you’ll soon be on top of your potentially problem debt again.
First you need to look at you total incomings and spend, if you’ve got more going out, than you have coming in, you’re heading for a potential debt disaster and really need to do something about it now. A good place to start is to see where you spend your money, in detail, and a spending diary is great for doing this. Once you have done that the next step is to set up a budget. You can find out how to do this in our two-part blog – Are you leaking money? - Part one and Are you leaking money? Part two
If all this still doesn’t have the desired effect, it may be time to start looking at debt solutions you can chat about which solutions might be right for you by contacting us using one of the options on the left of the page.
by Shelley BowersBack to blog home