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

You may be able to do this through a debt payment plan under the Debt Arrangement Scheme or a free debt management plan.

The Debt Arrangement Scheme (DAS)

See our fact sheet:

Debt Arrangement Scheme (DAS)

This is a Scottish Government scheme that gives you time to pay off your debts and gives you protection from most creditors. Sole traders, individuals and couples can apply for a debt payment programme through DAS. You usually need to have some money left over after your essential spending to be able to join a debt payment programme. From 11 December 2014 certain types of business can take part in a debt payment programme through DAS. The rules applying to businesses seeking a debt payment programme are different to those applying to a sole trader, an individual or a couple.

DAS for sole traders, individuals and couples

You join DAS through an approved money adviser to agree a debt payment programme. You will make one regular payment towards paying off your debts. The amount you could pay will be worked out by a calculation based on a ‘Common Financial Tool’. You will decide how much you offer to pay. As long as you keep to the agreed payments, no further interest, fees or charges are added to your debts from the date that you make your application. Diligence, or enforcement action to recover your debt, is stopped once your details are placed on the DAS Register and creditors cannot start a bankruptcy petition.

Important:

bank account

Once you have told the DAS Administrator that you intend to apply for a debt payment programme through DAS, your details will be put on the DAS Register. Your bank may restrict or suspend your account and you may need to apply for a basic bank account and basic business bank account.

Where a person gives consent to enable an application for a business DAS, their details will also be placed on the DAS Register, as well as the details of the business.

Making payments - ways to pay

Your debt payment programme can include both priority debts (such as household rent, household secured loan and household mortgage, business debts, council tax, gas and electricity) and non-priority debts (such as credit cards, loans, overdrafts, business debts and so on). You can keep your household mortgage arrears, household secured loan arrears or your household rent arrears out of the debt payment programme if you want to. An excluded debt will be noted in the debt payment plan application.

From the date that you apply for a debt payment plan, interest and charges are frozen. They will be written off if you keep to the debt payment programme, but if the programme is cancelled (for example, because you have not kept up with the payments), interest and charges could start to apply again. Interest and charges that had been frozen could also be added back onto the debt. For more advice about DAS and the protection you can get, contact us for advice.

DAS for businesses

Business DAS is an extension to the existing scheme for individuals and couples. Businesses must apply through an insolvency practitioner, have their established place of business in Scotland, or be constituted or formed under Scots law, and at any time carrying on business in Scotland.

The kinds of debts that business DAS deals with and the protection from creditors are the same as a DAS for individuals or couples. Your debt payment programme can include both priority business debts (such as gas and electricity) and non-priority business debts (such as credit cards, loans, overdrafts and so on). You usually need to have some money left over after your essential expenditure to be able to join a debt payment programme. The rules about when interest and charges are frozen and written off are also the same. The amount you will have to pay will be worked out according to a ‘Common Financial Tool’. However, to take part in a debt payment programme under DAS as a business you have to meet extra rules about:

Information:

composition and payment holiday

  • In a business DAS you cannot ask your creditors to accept a composition (where you pay a proportion of each debt rather than the full amount).
  • The option of a payment holiday in a business DAS, through a variation of the terms, may be possible. Debts included in a business DAS debt payment programme must be repaid within a five-year period.
  • the type of business;
  • who can consent to take part;
  • how you apply;
  • the viability of the business; and
  • assets.

The type of business and consent

The following types of business can apply for a business DAS:

  • a partnership;
  • a limited partnership within the meaning of the Limited Partnerships Act 1907;
  • a corporate body other than a company registered under the Companies Act 2006,
  • a trust; and
  • an unincorporated body of persons (for example, a football club).

You must apply for a business DAS through an insolvency practitioner. If you are not sure whether your partnership comes under the 'Limited Partnerships Act 1907', or whether your company is a 'company registered under the Companies Act 2006', ask your insolvency practitioner to tell you.

Consent requirements are different for each type of business.

  • Partnership: each partner must consent.
  • Limited partnership: every general partner (and any limited partner who at any time has taken part in the management of the firm) must consent.
  • Trust: the majority of the trustees.
  • Corporate body (other than a company registered under the Companies Act 2006) or an unincorporated body: a person authorised to act on behalf of the body must consent.

Application and declaration of viability

Your insolvency practitioner will charge a fee. They will need to provide a declaration of viability stating that the business:

  • can reasonably be expected to complete the debt payment programme;
  • will be able to pay the money required within 5 years; and
  • that the business continues to trade (where trading), or (if not trading) is otherwise operating in the purpose for which it was made (for example, a football club or a trust).

Assets

The business will need to inform their insolvency practitioner of all the assets it owns within 12 months of the DAS being approved.  It will not be able to sell any non-trading assets (such as tools of the trade) while the debt payment programme is in progress, unless it is for the benefit of creditors and with prior approval from the insolvency practitioner. 

Free debt-management plan (DMP)

In Scotland, a DAS debt payment programme is usually a much better option than a free debt-management plan because, for example, interest and charges automatically stop. You can also include priority and non-priority creditors and you are protected from creditors taking enforcement action.

See our fact sheet:

Debt-management plans (DMPs)

Under a free debt-management plan you make one payment every month to a debt-management company to cover all your non-priority debts. The debt-management company will divide up your payment and send it to your creditors for you.

You will not have to negotiate directly with your creditors and the debt-management company will try to get your creditors to accept your offers and freeze the interest. This is different to a DAS debt payment programme, where creditors have to freeze interest and charges from the date you apply and have to accept the level of payment, once the debt payment programme has been approved.

If you would prefer a free debt-management plan, we may be able to help you set one up if:

  • 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

Trust deeds

Information:

what are protected trust deeds?

Creditors can object to a trust deed going ahead by voting against it. If enough of your creditors either agree to your proposal or don’t reply (because this will be treated as agreement), your trust deed can become a ‘protected trust deed’. This is a special kind of trust deed and stops your creditors taking any more enforcement action against you, such as bankruptcy or sequestration (another name for bankruptcy). Legally, all of your creditors that are included in a protected trust deed must accept this arrangement, as long as you keep to the conditions.

A trust deed is another option instead of bankruptcy. This is a formal arrangement with your creditors. You make an agreement, through an insolvency practitioner (called a ‘trustee’), to pay an agreed amount off your debts over a fixed period of at least four years. The rest of your debts are written off. The arrangement might also involve selling your assets, such as your home, so that the money raised can be paid into your trust deed. If you are self-employed it may mean you have to stop trading. If you are allowed to continue to trade, the trustee will have to approve any important decisions you make.

Trust deeds have to be set up by an insolvency practitioner. Their fees can be quite high. However, if your trust deed was set up on or after 28 November 2013, these fees will be taken from the monthly instalments you pay. A trust deed is a voluntary agreement with your creditors. If you have a protected trust deed, your creditors must keep to this agreement.

See our fact sheet:

Trust deeds

Extra advice:

a protected trust deed through Business Debtline

We may be able to refer you to an insolvency practitioner. Contact us for advice.

 

Applying for a trust deed is a serious step. You need to get independent advice and think carefully about whether it is the best step to take, particularly if you own your home or run a business. Remember that other options might be available, such as a DAS debt payment programme. 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.

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