9. Implications of finance – dealing with debt

Some of these are more urgent than others – if you get seriously behind with your rent or mortgage, you may lose your home. If you don’t pay your fuel bills, your supply could be cut off. If you default on a credit card bill or an unsecured loan, your debt will increase, and you could eventually get taken to court.

To reduce your debts, you need to start planning and budgeting. If you know exactly how much money you have coming in, and what you need to spend, you can identify how much will be left to pay off debts.

Getting into the habit of budgeting is well worth the effort – it will help you pay off your current debts, and mean you’re less likely to get into problems in the future.

Choose from any of the following:

9.1 10 Dos and Don'ts for dealing with debts

9.2 Budgeting

9.3 Identifying your debts

9.4 Prioritising your debts

9.5 Priority debts: mortgage arrears

9.6 Priority debts: rent arrears

9.7 Other priority debts

9.8 Dealing with credit debts

9.9 Renegotiating your debts

9.10 What if a creditor refuses my offer?

9.11 Getting further help

9.1 10 Dos and Don’ts for dealing with debt

9.2 Budgeting

In the Spending and budgeting section, you may have used the Budgeter. You’ll be using it a lot in this section too.

Case study

Julie and Rajesh;

  • live in a two-bedroom flat which they bought with a mortgage from their local building society.
  • have one child.

Julie works 28 hours a week for a bank, but Rajesh has been made redundant from his job.

Here’s their personal weekly budget. Look at the range of things included in the expenditure section. Do they apply to you? Can you think of anything you have to pay for that isn't included here? Make a note of them.

9.3 Identifying your debts

Now you’ve drafted your personal budget, you need to go through the list of payments to check if you’re behind on the payments with any of them.

The shortfall between their income and expenditure has meant that for the last three months, Julie and Rajesh have not been able to pay their mortgage. They now have arrears of £616.00 to repay on top of their original payments. It would have been better if they had started dealing with the problem sooner.

Which of your payments are most likely to cause you problems? The ones to watch out for are usually regular weekly, monthly or quarterly amounts that you receive a bill or demand for and pay for by cash or cheque. Some of them may be paid directly from a bank account by Direct Debit or Standing Order. You should check your bank statements so you know when to expect these.

If the balance on your budget is less than zero, you need to think how you can increase your income or reduce your expenditure. The section on ‘Maximising your income’ can help you make a start with this.

If the balance on your weekly budget is more than zero, then that’s how much money you have available each week to repay your creditors. It may not seem like very much, especially when divided between several creditors, but it could well be enough – most creditors would rather you paid them a small, regular amount than promise to make a large payment you can’t afford.


9.4 Prioritising your debts

  • send the bailiffs to take furniture from your home (distraint).
  • ask the magistrates’ court to send you to prison.

Don’t worry – you will always be given warning, and provided you act quickly you should be able to stop these things happening.

The debts where these things could happen if you delay too long are:

Compare the list above with the list of creditors you made. Are any of your debts priority debts? Which ones?

If you don’t have any priority debts, you can go on to the section on ‘Dealing with credit debts’.

Creditors can take action on some priority debts without going to court first. For example, gas and electricity can disconnect you, and the Inland Revenue can send bailiffs to recover unpaid VAT and income tax without a getting a court order first.

Your other priority creditors can take action against you only after court action.

The next sections will help you think about the commonest forms of priority debt (and perhaps the most urgent):

  • mortgage arrears
  • rent arrears

If you don’t have any arrears on your rent or mortgage, you can go straight on to:

  • other priority debts

9.5 Priority debts – mortgage arrears

  • Methods of repaying your mortgage arrears
  • What if I can’t afford my mortgage?

Once you’ve worked out how much you can afford, contact your lender (the bank or building society who gave you the mortgage) to explain your situation and make an offer of repayment.

Getting help with repaying your mortgage

Income Support or Job Seeker's AllowanceIf you claim Income Support or Job Seeker's Allowance, the Benefits Agency will normally pay some of the interest on the mortgage.

This is how it works:

  • mortgage interest is paid at a standard rate set by the government, unless your interest rate is less than 5% in which case the actual interest rate will be paid
  • all mortgage interest payments are sent directly to your lender by the Benefits Agency, unless your lender is not part of the scheme agreed with the Benefits Agency
  • you can only claim interest on the first £100,000 of your mortgage, unless the extra was taken out to adapt your home for someone with a disability.
Existing borrowersIf you took your current mortgage out before 2 October 1995, you will generally have to wait 8 weeks before getting anyhelp with mortgage interest payments.

You will then only get half of your mortgage interest paid for the next 18 weeks (4 months) of your claim. After this, you will have your mortgage interest paid in full.

New borrowersIf you took out a new mortgage (or remortgaged) after 2 October 1995 and claim Income Support or Job Seekers Allowance you will generally get no help at allwith mortgage interest payments for the first 39 weeks (9 months) of your claim.

You will then have your mortgage interest paid in full.

Special rulesIf you or your partner are aged 60 or over the Benefits Agency will pay the interest in full immediately with no waiting time.

You will be treated as an existing borrower and not have to wait the full 9 months if:

  • you don’t have to sign on because you are caring for someone who is sick
  • you have had a mortgage payment protection insurance claim refused because of pre-existing illness or HIV/AIDS related illness
  • you are a prisoner on remand
  • you have a child living with you and you are claiming Income Support because your partner has died or has deserted you.
Are you paying too much tax?Check with your local tax office to make sure that you have the right tax code. Some employees can claim tax relief on work related expenses. You can get a higher tax allowance if you are registered blind or were widowed before 5 April 2000. If you are over 65 you can also get a higher tax allowance. Some maintenance payments also qualify. Check with your tax office.

A new Children’s Tax Credit has been available since April 2001. You can claim if you have a dependent child under 16. Contact the Children’s Tax Credit Helpline on 0845 300 1036.

The minimum wage – are you paid enough?Check that you are being paid the national minimum wage. This is £4.10 an hour if you are aged 22 and over and £3.50 if you are aged 18-21. For information ring the government helpline on 0845 6000 678.
Are you getting all the benefits you can?There are a range of different types of benefits which you might be entitled to. This will depend on your particular circumstances. You may be able to claim:
  • benefits based on National Insurance contributions you have paid. These include Contributory Job Seekers Allowance, Incapacity Benefit, Pensions and Maternity Benefits.
  • means-tested benefits. The amount of help you get depends on how much money you already have coming into your home. There are also set limits on how much savings you are allowed to have and still claim. You do not need to have paid National Insurance Contributions to claim them. They include Income-based Job Seekers Allowance, Income Support, Working Families Tax Credit and Disabled Person's Tax Credit.

Some benefits are not means tested, nor do you have to have paid any National Insurance contributions in order to claim them. These include Child Benefit if you have dependent children. There are also benefits for people with disabilities such as Disability Living Allowance, Attendance Allowance, and Invalid Care Allowance for their carers. Whether you can claim any of these benefits will depend upon the nature of your illness or disability and the effect it has on you.

Working out which benefits you can claim can be complicated. For more information on benefits contact your local Benefits Agency or a local advice centre.

Can you reduce your expenditure?If you’re struggling to make your mortgage payments, or trying to clear your arrears, one way of increasing the money you have to make these payments is to reduce your other spending.

Look at your personal budget again. Go through every item under Expenditure, and ask yourself these questions:

  • Do I really need this item?
  • Can I reduce the amount I spend on it?
  • Can I replace it with a cheaper alternative?
  • Are there any recent changes in circumstances that could affect the payment?

See the section on ‘Spending money and budgeting’ for more ideas on reducing your expenditure.

You might want to see what Julie and Rajesh (take a look at the case study) did before you decide on your savings.

When you’ve decided how much you can save, and on what, you can go back your personal budget to put in the changes.

Case study: Remember Julie and Rajesh? Their weekly budget showed they couldn't afford all their bills – they’d been missing mortgage payments as a result, and had built up arrears.

They go through their weekly expenditure, and identify the following items:

  • Housekeeping – if they spend more time on preparing food and spend less on ready-prepared meals, they think they can save £15.00 a week.
  • School meals – Rajesh will make packed lunches for Julie and their daughter every day, saving £7.50 a week.
  • TV – they decide to cancel their cable TV subscription, saving them £6.00 a week.
  • Maintenance payments – Because Rajesh has lost his job, his income has fallen. He contacts his former partner to negotiate a reduced maintenance payment, reducing it by £5.00 a week.
  • Mobile phone – Julie will only use her mobile for incoming calls and her ’free’ minutes – saving £3.50 a week.
  • Childminding – while Rajesh is out of work, they will stop using a childminder/babysitter, saving them another £15.00 a week.

This saves them a total of £52 a week, or £225.33 a month. So their weekly budget now leaves them £17.80 a week to repay their creditors.

Here’s their new personal budget.

If the value of your home is far more than the total mortgage, tell the lender. The more your house is worth, the less risk your lender is taking.

Sometimes your lender may agree a different arrangement. Some of these are:

  • adding the arrears to your mortgage
  • increasing the term
  • changing to a repayment mortgage
  • paying off the interest only.
Adding the arrears to your mortgageThis is called ‘capitalising’ the arrears. It works like this: the amount of the arrears is added to the total mortgage. The monthly repayments are increased to take account of this. So the arrears are spread over the remaining years of the mortgage term. This is usually only allowed if the total value of your house is a lot greater than the remaining amount of the mortgage.
Increasing the termMost mortgages are paid over a term of 25 years. If you bought your home several years ago, you can ask your lenders to extend the term back to 25 or even 30 years. This will cut the monthly payments, so that you can afford to pay an additional monthly amount for arrears. If you have an endowment mortgage, this may be more difficult. Ask your lender.
Changing to a repayment mortgageIf you have an endowment mortgage you may be able to change to a repayment mortgage. Endowment mortgages include an insurance policy and if you have had this policy for a few years it may have a surrender value. The surrender value is the amount of cash the policy is worth if you cancel it.

Ask your lenders about this and get independent advice on whether:

  • it is a good idea to cash in or sell your endowment policy;
  • changing to a repayment mortgage will reduce your monthly payments.

If you cancel your endowment policy, ask your lender about a mortgage protection insurance policy. This would pay the mortgage if you died.

If you do change to a repayment mortgage you should also ask your lender to extend the mortgage term.

Paying off the interest only
If you have a repayment mortgage you could ask your lender to accept a monthly payment that just covers the interest on the loan. This will have to be a temporary arrangement. If you already have arrears your lender will expect small monthly payments for these too.

What if I can’t afford my mortgage?

Many people find that because their mortgage is high or their income has fallen they can’t pay the monthly instalments. If you are in this situation:

  • explain the problem to your lenders
  • pay what you can afford
  • look for ways to increase your income (see ‘Maximising your income’).

If this still doesn't help, you could also consider:

  • handing back the keys
  • selling your home.
Handing back the keysIf you give your home back to your lenders you will still be charged monthly installments on the mortgage. If you do not pay, the installments will be added to the debt when the house is sold. Extra interest can also be added on to the arrears figure. The monthly installments will only stop being added when your lenders sell your home. This could take a long time. The lender will probably add solicitors’ and estate agents’ fees and any court costs on to the bill.
Selling your homeIf you are thinking of selling your home you need to think about where you will live.
  • Can you sell your home and buy a smaller property?
  • Look at renting from a housing association as an option.
  • Private renting may be an option but you need to be careful about the type of tenancy you are offered and how high the rent is. Sometimes if you claim Housing Benefit your Council can decide that your rent is too high and restrict the amount of rebate they will pay you.
  • You may have friends or family that you can live with, at least temporarily.
Making an offer of repaymentFirst make an informal contact by telephone, and ask for their advice. They may ask to you to go and see them for a meeting to discuss the options, or to write to them explaining your situation.

If you go and see them take a copy of your personal budget and the letter with your offer of repayment. Otherwise, send them the letter and a copy of your budget by post.

You can use the ‘Creditor letters activity’ to help you write your offer of repayment letter. Here’s a sample letter to help you: