Step 4 Dealing with your non-priority debts

​​What are the options for dealing with my non-priority debts?

There are different options for dealing with your non-priority debts, depending on your circumstances. We have outlined some of the main options below.

Which option is right for you will depend on things such as your income, how much debt you have, your assets, whether you own your home and the possible effect on your business. Your credit rating will normally be affected, whatever option you decide to take. This means it may be difficult for you to get credit in the future.  

Can I get credit again?

What if I have some money left to pay my creditors?

Pro-rata offers of payment

Pro-rata calculation

  • Step 1 – make a list of all your non-priority creditors and how much you owe each of them.
  • Step 2 – add up the total amount that you owe to your non-priority creditors.

You will then need to follow steps 3 and 4 for each non-priority debt.

  • Step 3 – multiply the amount you can afford to pay your non-priority creditors by the amount of debt that you owe an individual creditor.
  • Step 4 – then divide the figure worked out in ‘step 3’ by the total amount that you owe to all your non-priority creditors.

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. Our budget tool, Your budget, will work out pro-rata offers of payment to your creditors for you. The calculation is also shown here. Alternatively, contact us for advice.

You also need to ask your creditors to freeze any interest and charges. You can write to your creditors, sending them a copy of Your budget, and ask them to agree to your offers of payment.

Pro-rata offers sample letter

Example  pro-rata calculation

Pat and Eva have worked out that they can afford to pay their non-priority creditors £107 every month.  This is their surplus for non-priority creditors. 
 
Non-priority creditors​ ​Amount owed ​Monthly pro-rata offer ​Pro-rata calculation
​Newhome catalogue ​£918 ​£14
£107 x £918 ÷ £7,227 = 13.59 (rounded up to £14)
​Alphabet bank loan ​£2,842 ​£42 ​£107 x £2,842 ÷ £7,227 = £42.08 (rounded down to £42)
​Unicorn credit card ​£3,467 ​£51
​£107 x £3,467 ÷ £7,227 = £51.33 (rounded down to £51)
 
​Total owed to non-priority creditors = £7,227
Total amount for non-priority creditors = £107
 

Working out offers of payment to non-priority creditors

Free debt-management plan (DMP)

This means you make one payment every month to a debt-management company to cover all your non-priority debts. This will be divided up and sent to your creditors for you. You will not have to negotiate directly with your creditors to accept your offers and freeze the interest. Contact us for advice. We may be able to help you set up a free DMP if:

See our fact sheet:

Debt-management plans (DMPs)

  • you can afford to pay at least £5 to each of your debts; and
  • you can repay your debts within 10 years.

 

Bankruptcy

You may want to think about bankruptcy, even if you have some money left to pay your creditors.

Bankruptcy

Individual voluntary arrangements

An individual voluntary arrangement (IVA) is another option instead of bankruptcy. This is a formal arrangement to pay an agreed amount off your debts over a shorter period, such as five years. The rest of your debts 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. An IVA is usually only an option if you have a reasonable amount of money available every month to pay your creditors or you have a lump sum or assets that you can include. In rare cases, you may risk losing your home. Contact us for advice.

Administration orders

See our fact sheet:

Administration orders.

If you have a county court judgment, 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 to the court. The court then shares the money between your creditors. The total of your debts must be no more than £5,000. Your creditors can’t take any further action against you if you have an administration order, as long as you keep up the monthly payments.

You may need help in filling in the application form as local courts deal with administration orders differently. If you want to apply for an administration order, contact us for advice.

Can I offer to pay 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 the payment and write off the rest of the debts. This is known as ‘an offer in full and final settlement’. This may be an option if you 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. If a creditor agrees to your offer, make sure they confirm this in writing.

Consolidating your debts into a new loan

This is where you add all your debts together and take out a new loan (a consolidation loan) to pay them off. You need to think very carefully before deciding to do this. Check out consolidation loans on the Money Advice Service website www.moneyadviceservice.org.uk.

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. Before agreeing to a consolidation loan, contact us for advice.