Getting Your Debt Priorities Right

One of the most difficult financial juggling acts is that of an ordinary family trying to juggle its weekly or monthly finances to keep all those competing creditors at bay. One of the principal reasons people fall into major debt problems is trying to satisfy lots of different creditors at the same time when there has been a significant fall in family income – unemployment; a new baby or a relationship split to name but a few. The so called “debt spiral” of borrowing from one creditor to satisfy others can quickly become a significant debt problems running to more than £20,000.

If you should find yourself in a position where you cannot meet all of your financial commitments then there are certain golden rules which you need to take account of immediately when putting together your financial budgets.

Firstly you will need to identify the difference between the Priority Debts and the Non Priority debts within your family. A Priority debt is one which will directly impact upon the health and personal wellbeing of you and your family if not maintained.

Key priority debts which must be paid are as follows;

Mortgage or rent - This may seem obvious but I lose count of the number of times we talk to people who are in arrears with the mortgage or rent and yet up to date on unsecured loan repayments. Keeping the family roof over your head is number one priority. A mortgage company can and will commence repossession proceedings in the event of significant arrears and 2006 saw the highest number of property repossessions ever in the UK.

Secured Loans - Homeowners often take out a “secured loan” or “second charge” against their property. Please do not confuse these loans with other “personal” loans. These are secured against your property as a second mortgage and must be maintained in exactly the same way as your main mortgage. The consequences of failure to keep up repayments on this type of debt - ultimately repossession of your home – should be spelt out to you in very clear language before you commit to such a loan. If you are in any doubt as to which type of loan you have signed then please seek professional advice as a matter of urgency.

Council Tax - This is a priority debt because it is actually a criminal offence to owe council tax; the continued wilful non payment of which could mean time in prison! Likewise any Police or Court fines need to be paid as well as it is also a criminal offence not to pay these.

Utilities - Gas water and electricity payments should be maintained where possible as a priority over unsecured loans and credit cards. The Utility companies are willing to help as much as possible those with debt problems to reschedule their utility debts to a more manageable level.

Food and Clothing - A recent survey by Barclays and children’s charity NCH has found that some 10% of British families have gone without food and medicine at some point because they were too poor to purchase it either due to general poverty of due to other competing debt problems. We cannot stress highly enough that the provision of basic food, clothing and family hygiene always comes before the repayment of any non priority debts which you may have.

Car Hire Purchase (HP) - Vehicle finance, to the ordinary consumer, is either a form of HP or a Personal Loan (other so called leases and contract hire are usually reserved for the self employed). There is a major legal distinction between these two ways of funding a vehicle purchase. A HP agreement means you do not actually own the vehicle until all payments are made and therefore you must maintain payments or the vehicle will be repossessed (this type of arrangement is effectively a mortgage on a car). If the car is on a personal loan type agreement then you automatically own the vehicle and the payments can be varied as an unsecured debt. Again if you are in any doubt as to which type of agreement you may have and your rights and liabilities e.g. to terminate the agreement then please obtain some independent professional financial advice.

Non priority debts are basically every other type of debt you may have. Personal loans; credit cards; store cards; bank overdrafts; “door step” credit like Provident; catalogues; credit unions etc. In the event of a financial crisis within the family these non priority debts should only be paid when the priority debts have firstly been maintained. As you sit down to work out the family budgets you must put all the priorities at the top of your list together with basic insurances and travel costs these must be paid first. Quite often there will be a shortfall in the remaining funds available to pay the unsecured or non priority debts in the short term and this is where professional financial advice can really make a difference to the quality of your family life.