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Have you ever wondered what the rules are for people in debt? It is not uncommon that at some point in their lives, people fall into debt. This can happen for a variety of reasons including illness, a change in employment or indeed a loss of employment. Being in debt can make people very anxious about how they are to improve their situation. However many do not understand what the rules in this area are.
In this guide we set out the detail of what happens when you are in debt, and the different options available to try and discharge your financial obligations to others.
It is an unfortunate fact that at some point in our lives, we will all at some point be in debt to another party. In most cases debt tends to be a familiar topic when dealing with banks or credit card companies. However it can often come up in dealings with landlords, if you are behind in paying your rent. The important point to keep in mind, should you find yourself in debt, is to engage with the people/ organisations to you owe money to (their title will be your 'creditors').
The first thing that you should do if you find yourself in debt is to try and organise (i) what you owe and (ii) to whom you owe it to. In terms of organising what you owe, you should try and classify your debts as falling into one of two categories:
1. Urgent debts
It would not be correct to say that satisfying one kind of debt over another is more important – all debt is important and should be repaid at the earliest opportunities. However urgent debts, sometimes known as 'priority debts' are those debts that have particularly severe consequences if not repaid. They include:
Urgent debts are deemed as such because a failure to pay them is, in most cases, contrary to law or at least in violation of a contract that you have with a service provider e.g. a bank.
2. Less-urgent debts
This category of debt, otherwise known as 'non-priority debts', does not carry the same consequences for failing to make payment as priority debts. However, a failure to pay them can still result in your being presented with a significant penalty. Non-priority debts include:
The point to note about less-urgent debts is that in most cases, a failure to make payment is unlikely to result in your being sent to prison. However non-payment will in almost all cases result in your creditors bringing the matter to the attention of the courts. If a court is not made aware of any extenuating circumstances to explain why you have not made payment on these debts, it could permit your creditors to take further action against you.
The action that you can take in respect of paying off your debts will ultimately depend on the type of debt that you are dealing with. While in all likelihood you would wish to have all of our debt satisfied as soon as possible, you may not have the finances to make this a reality.
In most cases creditors will take a similar approach to debt. If you are already in debt to your creditor, or believe that it is a real likelihood that you will not be able to make payment, in the first instance you should contact them and bring this to their attention.
In your discussion with creditors you should try to come to some kind of arrangement that will allow you to try and repay the debt that you owe. Alternatively if you cannot make repayment as soon as you would like, request some time to allow you to either find the money or, to speak to a professional advisor who will be able to help you.
Your creditors should in most instances behave reasonably with you. There is a voluntary Code of Conduct (available here) for creditors to whom you owe money, which asks that, if you are in severe financial difficulty they approach your situation with tact.
If you will be unable to make full repayment, then ask your creditors whether they will consider a series of smaller, regular payments in order to satisfy the outstanding debt. You must be very clear on whatever you offer to do, and what is ultimately agreed between you both concerning the settlement of your debt to them.
You should also be aware that creditors are not entitled to harass you in an attempt to ensure satisfaction of the debt that you owe. Aggressive practices by lenders to organise payment of debt is a criminal offence, and should be brought to the attention of the authorities.
The options available to your creditors in securing the money that you owe them will again depend on the nature of the debt in question.
1. How do creditors deal with urgent debt?
Given the consequences that follow from the non-payment of priority creditors, they are obliged to take certain steps when dealing with outstanding debt, before they take any legal action:
2. How do creditors deal with less-urgent debt?
Most creditors of less-urgent debt will not have the same requirements imposed on them as those dealing with urgent debts. However they should take your case seriously, and be reasonable in considering any proposal that you make to facilitate repayment of debt. You should note however that they are not obliged to accept any offers that you make, if they are not persuaded that you will be able to honour the repayment plan suggested.
3. What is the final option available to creditors?
If your creditors (for either urgent or less-urgent debt) have discharged all of their obligations, in terms of dealing with your attempts to repay debt but are still not convinced, their final option is to approach the courts to force you to make payment. Depending on where you live in the UK, the courts will approach your being in debt in different ways.
In England and Wales a creditor's approaching a court for an order to force you to make payment of debt is called making a claim. You will normally be notified that they are taking court action against you. If you fail to respond to this, or attempt to come to some kind of agreement with your creditor they can ask the court to enter judgement by default, allowing them to take direct action to recover payment from you. If you still refuse to pay after being notified of the court's judgment, your creditor can ask the court to issue an enforcement order. If this is granted, your creditor will be able to instruct bailiffs to take things form your home, take money from your monthly salary and even secure your debt against your home.
In Scotland where a creditor seeks the court's permission to force you to pay debt, it is called diligence. The first thing that a creditor will have to do is prove to the court that you owe them debt: they will seek decree to be made against you. Depending on the type of debt in question, court can then be asked to make a variety of orders:
Regardless of the type of court order in question, in Scotland a creditor must issue you with a charge for payment and a debt information and advice package before they make use of the court order.
Nothing in this guide is intended to constitute legal advice and you are strongly advised to seek independent legal advice on matters that affect you.