Be clear about debt

This page contains information about debt solutions available in England, Wales and Northern Ireland. Debt advice in Scotland involves similar but different solutions. Before considering an IVA as a debt solution, please make sure you fully understand the risks involved when entering an IVA.

What does that mean?

We want you to be clear about debt, as well as clear of debt. However the terms used in money management can be confusing, and some companies use them to mystify or scare you.

So to help clear this confusion, each morning we tweet about two terms used in the industry and explain what each means.

40. Do you need to owe a certain amount of money before you get debt help?

There’s no “minimum amount” of debt needed before you can get debt advice, and you don’t need a certain level of income either.

Everything is relative to your situation which is why we look at every person’s circumstances individually. Whether you owe £5K or £50K, or if you’re on benefits or earn hundreds of thousands a year, we can help.

The main issue is whether you’re struggling or not. If you can’t manage your debt repayments get in touch with us and we can provide you with free and impartial debt advice.

Use our online debt advice service Debt Remedy, or visit our Contact Us page for more information.

39. What happens if I can’t afford to pay the rent?

If you fall behind with rent payments, the eviction process is quite long, giving you time to make an arrangement and stop any further court action.

Your rights depend on what sort of tenancy agreement you have, so it’s important that you check your agreement first. Shelter has a lot of useful information which should help you work this out.

The most important thing to remember is that it’s never too late to make an agreement. No matter how far along the eviction process you are, if you’re able to make a reasonable offer it’s worth doing it.

If you’re struggling with rent payments and would like to learn more about the eviction process, read more about what happens if you fall into rent arrears.

38. Where can I get debt advice over the bank holiday weekend?

So you’ve got four days off work and a bit of time to sort out those niggling finances that you’ve been meaning to do for ages. But the frustrating thing is that all the advice agencies are closed…or are they?

Bank holidays can be a perfect time to take control of your money worries. Start by putting together a budget and let us help you work out the best solution for you to become debt free.

Most free debt advice organisations and even the fee charging ones won’t be open for business over the weekend but we can still provide you with free, impartial and immediate debt advice no matter what time of day or night it is.

Debt Remedy is our online debt advice service which can help you find a debt solution straightaway. It’s been around for nearly 6 years and has helped hundreds of thousands of people find the best answer to their debt problems. So what are you waiting for – try it now!

37. How can I afford to go bankrupt?

If personal bankruptcy is the best solution for your debt problems your situation can often be very serious, you’ll have little or no surplus income and usually very few assets. Its ironic then that to petition for your own bankruptcy can cost you £680 [Editor’s note: in England and Wales as of 2017; in Northern Ireland it’s £659].

The fees are broken down as £130 for the application alongside £550 to the official receiver. We often speak to clients who wonder how they will ever be able to afford these fees.

Our dedicated bankruptcy team can advise on how these costs can be reduced. If you are in receipt of certain benefits the court fee can be waived, we also advise clients on what trust funds/grants they may be able to apply for. In the last 18 months we’ve helped clients access over £77,000 worth of grants which assisted clients with the petition fees.

The most important thing is to take free and impartial advice, and under no circumstances should you take advice from a fee charging ‘bankruptcy advice service’.

36. Can rent arrears be included in bankruptcy?

If you pay rent on the place that you live in it’s important to understand that rent is a priority bill and if not paid could lead to your eviction.

If you live in local authority housing and you’ve run up rent arrears it’s possible to include them in your bankruptcy and continue to live at the property.

If personal bankruptcy is the best solution for your circumstances you should speak to your local housing authority and explain your situation. You should also seek free and impartial advice from our dedicated bankruptcy team. In bankruptcy the rent arrears will be treated the same as any other debts.

You would also need to demonstrate to the official receiver that you have a balanced budget and that you won’t run up further arrears while you are bankrupt.

If you have rental arrears from a private landlord it would be best to clear them before petitioning for bankruptcy to enable you to stay in the property. You should also check the terms and conditions of your rental agreement before petitioning.

35. What is a tomlin order?

We’ve received a large upsurge in visits from Google for tomlin orders over the past month so we felt we better cover them in more detail.

When a creditor issues a county court judgment (CCJ) against you it might be worthwhile checking the terms and conditions of your employment contract, as some professions are affected if you receive a CCJ.

However there is an alternative to a CCJ that some creditors may agree to; this is called a tomlin order. A tomlin order (which is also known as a consent order) is a legally-binding agreement that is a good alternative to a CCJ. Importantly a tomlin order will not (usually) adversely affect your employment.

The creditor may ask for proof that a CCJ will jeopardise your employment. If you can provide this proof, a document or schedule will be drawn up and this would then be presented to the court.

If you later default on a tomlin order the creditor can return to the court and apply for a judgment to be entered without having to re-start the proceedings.

If a creditor has issued you with CCJ paperwork and you believe it could impact your job it’s important to act quickly and contact us so that we can discuss your options.

34. Is a county court judgment (CCJ) payment set in stone?

We all know that circumstances can change quite quickly – whether it’s an increase in priority bills, fewer hours at work or even the occasional pay rise.

It’s vital that you maintain your payments on a CCJ to avoid further court action. If something changes that means you can no longer afford it you can apply to change the amount you pay. On the other hand, if you feel you can afford more and would like to clear the debt quicker, you can do the same.

You would need to fill out an N245 form which you can print out or collect from your local county court. You can explain your situation and make a more realistic offer of payment. It costs £40 to submit the application but if you’re on a low income you can apply to have the fee waived.

If you’re struggling with CCJ forms, get in touch with us and we can talk you through your options.

33. How much debt is ‘a problem’?

We talk about ‘debt problems’ quite a lot, but what level of debt is a problem? After all, some of our clients struggle to pay back £500, others £50,000.

A >debt problem refers less to a certain amount of money or a proportion of your income. It’s more about when the stress of trying to find the money to pay back the debt becomes too much and you display certain behaviours.

Warning signs that indicate a debt problem might include:

Missing repayments
Phone calls from creditors
Using credit to pay priority bills
Using the overdraft each month
Not being able to make it to payday on a regular basis
Trying to take out more and more credit
Paying minimum payments every month
Paying bills via other forms of credit (“robbing Peter to pay Paul”)

If you recognise these in your own financial behaviour then it’s time to take stock, do a statement of affairs or a personal budget, and get in touch with us for debt advice.

32. How can I stop a creditor contacting me?

When creditors start following their debt collection process the first step is usually to speak to you by phone. Many people find this difficult to cope with, particularly if you have given a work phone number for them to contact you on.

You can’t really stop a creditor from contacting you. However if you’re being plagued with calls about your debt you can ask the creditor to remove your telephone number from their system and only communicate with you in writing. You’re completely within your rights to do this.

Once you’ve asked the creditor to only contact you by letter you must keep on top of any paperwork the creditor sends and respond in writing if necessary. If the creditor continues to hassle you by phone you can make a complaint to the Financial Ombudsman.

Our blogpost on what to do when creditors keep phoning you is a good place to start. It’s always best to seek free and impartial debt advice when dealing with creditors; you can do this online by using our free debt advice tool Debt Remedy.

31. How do we calculate payments to creditors on debt management plans?

During a debt advice session a budget is put together to look at the solutions that are available. If a debt management plan (DMP) is recommended, we work out an affordable monthly payment that is realistic and sustainable.

We prorate the amount left over based on the monthly contractual payment to the debt (the minimum payments that the creditors ask for). This differs to most other providers who tend to prorate on balance. We’ve found that by using this method, people see some of their debts being paid off sooner and this can help with motivation.

30. What goes in a personal budget?

Many people put off writing a budget as it seems too difficult, or perhaps will reveal a debt problem that they’re trying to avoid. Around a quarter of the UK population has never put a budget together but as we say, a budget is “at the heart of money advice”.

Budgeting is key to good money management. It helps reduce stress and gives you a clearer idea of what you’ve got coming in and going out. It means that you can clearly plan any future financial steps.

There are quite a few applications or downloadable resources that can be used to record your personal budget. These make writing a budget so much easier as they break down your budget into manageable sections, so you shouldn’t miss anything.

Our friends at Credit Action have a downloadable personal budget sheet that can be used each week or month
The Money Advice Service has an online budget planner
If you’ve got Microsoft Office you can download an Excel worksheet called Personal Budget
Google Docs have many free budgeting templates available

If you need help with your budget, read our articles on a beginner’s guide to budgeting, 10 things you need to budget for and how to stick to a budget. Used alongside one of the budgeting tools or sheets above, these articles will help you get to a budget that works for you.

If you find that your financial affairs are not in order, contact us or use our online debt advice service Debt Remedy.

31. How do I check if I have a county court judgment (CCJ)?

We often come across clients who have debts and have moved property without informing their creditors. They’ve then lost contact with the organisations they owe money to and fallen out of the debt collection process.

Some think that because they have lost contact they are free of the debt. However, we often find that creditors have secured a county court judgment (CCJ) that the client is not aware of.

If you have lost touch with a creditor and are unsure as to whether they have taken out a CCJ the easiest way to find out is to contact the creditor directly. However, you can also find out by getting a copy of your credit file where the CCJ will be listed (if it was within the last six years).

There are three credit reference agencies; you can find them listed below.

If a CCJ has been granted and you were not aware of it, this would mean that you have not complied with the order and this could lead to further action from creditors in future. If you find yourself in this position I’d recommend that you contact us for some immediate advice.

32. Is it true you can have your debts written off?

Certain debt solutions such as IVAs, bankruptcy and DROs can write off a proportion and in some instances all of your debt.

We hear a lot of advertising campaigns from companies claiming that there is a quick and easy way of writing off debts – and we all know that opting for a debt solution such as bankruptcy is hardly ever an easy decision.

A lot of these companies refer to situations where the debt may be unenforceable. This could be because the creditor has made an error on your credit agreement, or because the debt is statute barred under the Limitations Act.

Although both these circumstances could make the debt unenforceable, it wouldn’t write off the debt – it would just mean that the creditors can’t pursue you through the courts for the debt. You’d still be liable and could be chased for any amounts outstanding. They could also continue to add interest and charges which would just make the debt bigger and bigger.

There is also the option of making settlement offers but it’s important to know that you don’t have to pay for a service to do this for you, as we can advise you how to do it for free.

33. How does debt affect women?

Debt seems to affect women in different ways to men. For example, we’ve found that women are twice as likely as men to be in debt due to divorce or separation, but (positively) are more likely to seek debt advice than men, and owe less on average.

In research conducted earlier this year we found that the proportion of women who encounter financial difficulty due to separation or divorce is almost double that of men (12.5% compared to 6.8%).

These findings tie in with our articles last year It’s the recession hitting women harder, not the shopping bill.

If you’re suffering from debt, whatever your gender or marital status, you can get help from us instantly by using our online debt help service Debt Remedy.

34. What’s the difference between the perception and the reality of debt?

The simplified perception of personal debt among a lot of the general public is that people spend too much on flat-screen tellies and new sofas and this forces them into debt. This isn’t completely true (although, as some StepChange clients tell us, “retail therapy” was can be their downfall).

The real causes of problem debt are “life shocks” or “life changes”: job loss, reduced hours or pay cuts, or in our personal life with divorce, separation and bereavement.

The reality is that around 50% of our clients came to us because of a job loss or a pay cut. Only 10% said that overspending was the main cause of their unmanageable debt.

Last year we polled the public on what they felt were the causes of debt. It showed the difference between the perception and reality of debt quite starkly.

35. How long does a debt solution last?

Each and every debt solution is different. Some solutions are legally binding and their time frames set. For example an individual voluntary arrangement (IVA) will usually last five to six years depending on whether you have a property or not. However, a lump sum IVA can be done and dusted in matter of weeks.

A debt relief order (DRO) has a set time frame of 12 months, after which your debts are usually written off. If you fit the criteria this can be an excellent option.

Bankruptcy is for many people the quickest way to get debt free. Most personal bankrupts are discharged after 12 months although they may need to continue to pay their surplus income (if they have any) into the bankruptcy for a total of 3 years.

Debt management plans (DMPs) have no set time frame and depend on your debts and your ability to repay. We cannot give guarantees on how long a DMP will last as the term is based on what you can afford to pay month on month. The best we can do is give as close an estimate as possible.

It’s important to remember that we don’t charge any fees for providing DMPs when this is the best solution for our clients. Please also be aware that being on a DMP is likely to affect your credit rating.

Another solution for those over 55 with a property is equity release. We have a dedicated team that can advise if this is a solution you should consider.

If you have problem debt our online service Debt Remedy will diagnose the correct solution based on your individual circumstances.

36. What’s the difference between priority bills and non-priority debts?

We classify bills and debts into two types – priority and non-priority. Some people mistakenly think that a credit card debt is a priority, usually because those companies tend to shout the loudest for repayment.

However, priority bills are those that keep a roof above your head, the house warm and the water running. Not paying these can lead to serious consequences, up to and including jail time if you refuse to pay council tax.

We advise that if you’re struggling to pay your bills the priorities should be covered first, outgoings such as food and transport next, and then non-priority debts. These include such things as credit cards, unsecured loans and store cards.

We’ve got a good page on the main website showing a breakdown of priority bills and the consequences of not paying. If you’re having problems affording your repayments, please read our posts – beginner’s guide to budgeting and how to stick to a budget. For more help contact us

37. How can I get my creditors to freeze interest and charges?

No debt management provider can guarantee that they will stop interest and charges. The only way you can be 100% assured that you won’t get further charged is if you opt for a legally binding debt solution – such as an IVA or DRO.

Unfortunately your creditors are within their rights to add charges as they are stated up front in the terms and conditions that you sign when you agree to take out the credit.

We have a dedicated team that works with creditors to understand our process and why stopping charges is beneficial for everyone.

Many debt management companies will claim that they are better at stopping interest and charges but this is not true. It’s against the Office of Fair Trading’s guidance to imply this [Editor’s note: The OFT was replaced by the FCA in 2014], so if you’ve been wrongly advised it’s important that you report the company involved.

38. Is a consolidation loan a good idea?

We don’t normally recommend taking out further lending as a viable solution to a debt problem.

While consolidation loans might seem like a good idea to reduce your monthly payment, in reality they mean you’re borrowing more money over a longer period of time and actually increasing the amount you owe.

Our blogpost on this subject goes into more detail as to why in most cases a consolidation loan might not be such a good idea.

39. What’s the difference between getting debt help online, over the phone and face to face?

There are three methods of getting debt help – online, over the phone and face to face. We tend to focus on providing the first two, but in certain circumstances we also provide face to face debt advice.

We offer online debt help through our online debt help service Debt Remedy. The advantages of the service are that it’s completely anonymous, is available 24/7, and provides you with the same advice as you’d receive on the phone but without having to talk through your problems.

Debt Remedy takes around 20 minutes to complete, and at the end of the session you’ll have a recommended solution to your debt problem, tailored advice, a personal budget showing your income and outgoings, and details on your next steps.

Of course, some people feel that computers are a bit impersonal and prefer to talk through their problems with someone. We have dedicated Helpline and Debt Advice teams that speak with 100s of people each day between 8am and 8pm Monday to Friday (8am to 4pm Saturday). We aim to advise all callers as quickly as possible, usually straightaway.

Whichever route you choose, we provide expert debt advice that’s tailored to your individual circumstances and that doesn’t cost you a penny.

40. Is bankruptcy the easy way out?

If you can’t afford to repay your unsecured debts, bankruptcy could be the best debt solution for you. If you read some of our national newspapers you’d be forgiven for thinking that bankruptcy is the easy way out, a simple process that wipes clear the rest of your debts. But is it that straightforward?

A lot of people claim that bankruptcy is the cheapest way to deal with your debts. This can be the case but not everyone realises that there is a £680 fee that has to be paid up front and in full.

In today’s economic climate we find that we speak to a lot of people that have more to pay out than they have coming in. This is what we call a deficit budget. In this instance we wouldn’t usually recommend bankruptcy until the budget is balanced and you can afford to pay for your everyday living costs. Although bankruptcy would rid you of your unsecured debts you’d still be living with a day-to-day shortfall. As a result bankruptcy can sometimes be rejected.

We often recommend bankruptcy and have a specialist support team to help and advise people through the process. Going bankrupt is a big decision and there are lots of myths associated with it. It can affect your employment and will have a negative effect on your credit rating, but for many people it can be the best and only solution available.

If you’re considering bankruptcy as an option, get in touch for some free and impartial advice to make sure it’s the best solution for you.

41. What’s the difference between a DRO and an IVA?

A debt relief order (DRO) and an individual voluntary arrangement (IVA) are both forms of insolvency that help resolve unmanageable debt.

To qualify for a DRO you’d need to owe less than £20,000, not be a homeowner, have no assets worth more than £1,000 (cars or vehicles up to £1,000 in value are exempt) and have less than £50 per month left after all your essential costs are covered. You must also live in England, Wales or Northern Ireland, or have conducted business in one of these countries in the last three years.

The cost of a DRO is £90 and if within 12 months there has been no change in your circumstances the debts are written off. A DRO is often seen as a low cost alternative to bankruptcy.

DROs applications can only be submitted by certain organisations and we proud to be able to offer this service to our clients.

An IVA in an agreement between you and your creditors overseen by a licensed Insolvency Practitioner. The agreement usually lasts between five and six years. You’d be expected to pay your surplus income into the IVA for the term of the agreement. At the end of the IVA the remaining debt is written off.

If you’re looking for what debt solution would work best for you it’s important to get free and impartial advice.

42. What’s the difference between a payday loan and an overdraft?

This might seem like a simple question but the outcome of not looking after either can have massive effects on your financial wellbeing.

A payday loan is (usually) a short term loan of a few hundred pounds for up to 30 days. The specific amount borrowed and the repayment schedule can change, but is typically paid back on the borrower’s next pay day. The interest is usually around £25-£30 per each £100 loaned. Should you not pay back on schedule, there are additional charges payable. These can spiral out of control quickly.

An authorised overdraft is, for all intents and purposes, also a loan (an overdraft is a debt), but shown in your bank account statement as negative amount. It’s seen as a “safety net” but can, all too frequently, be used permanently, costing in interest charges and monthly fees. While this type of debt is less obvious than a payday loan, because an overdraft is seen as the safety net these charges are more likely to continue for months or years.

There’s also a third option: an overdraft that isn’t authorised. These can be incredibly damaging to your credit rating and if you go into the red without prior agreement with your bank, or go above your pre-agreed overdraft limit, the fees and charges can be very high, up to £150 a month. These charges can be levied on something as small as going a pound over your limit.

We sometimes get asked which is the best option to take, but there isn’t one. Taking a one-time payday loan or using pre-authorised overdraft sparingly should be no issue, as long as you budget carefully and pay back on time. If you’re relying on either to get through each month then you need to get debt help.

43. What’s the difference between a county court judgment and an attachment of earnings order?

If you fall behind with payments on an unsecured credit debt, your creditors can take enforcement action through the court. Both county court judgments (CCJs) and attachment of earnings orders are examples of this. If you don’t stick to the conditions specified, further action can be taken as they are legally binding.

The first enforcement stage after a default notice is a county court judgment (CCJ). If you receive county court paperwork through the post it’s important to respond as quickly as possible. We have a handy guide detailing what to do if you get a CCJ which will help if you’re unsure about the process. Once the payment is set at a rate that you can afford you need to maintain the payments.

If you don’t respond to the paperwork or fall behind on your payments your creditor has the option to apply for an attachment of earnings order. This allows them to take instalments from your wages. There are also other ways that the creditor can enforce the debt which you can read about in our here.

If the order is granted, the court will contact your employer and they will start to take the payments from your wage along with a £1 admin fee.

If you have received any court paperwork, get in touch with us so that we can give you the advice you need.

44. Why have I received paperwork from Northampton County Court?

If you were to receive a county court judgment (CCJ) it will most likely be issued by Northampton County Court in the first instance. Northampton is a specialist bulk centre for issuing CCJs.

CCJ paper work is pale blue in colour with a court crest on the top, you will find the following paperwork enclosed.

N1 (amount owed, creditor and which court is dealing with it)
N9a (admission form)
N9n (defence form)

The creditor in question will need to have issued a default notice before they can proceed with the application for a CCJ.

If you do receive CCJ paperwork from Northampton County Court we recommend that you seek free and impartial debt help as soon as possible. You could also read our blogpost about how to deal with a CCJ.

45. What’s the difference between a free DMP and a fee-charging one?

A debt management plan (DMP) is a way of lowering your repayments to your creditors, to enable you to afford both them and your day-to-day living costs.

Charities and non-profit organisations offer free DMPs; this means there are no costs associated with the set up and the management of the plan while you pay off your debts.

Commercial companies also offer DMPs, but there are on-going costs associated with the plan on top of the repayments. These can include an upfront (set-up) fee and on-going monthly fees throughout the lifetime of the repayment.

For examples costs and a comparison between our service and those of fee-charging companies, see ‘Appendix A’ in our written evidence to Parliament from February this year.

We argue that if you need to lower your repayments with a DMP, so you can afford day-to-day living expenses again, you’re unlikely to be in a position to pay further fees on top of your existing debts.

46. What’s the difference between an administration order and a debt relief order?

Debt relief orders (DROs) and administration orders (AOs) are quite similar in the sense that they’re both legally binding debt solutions. They both have very set criteria but this is where they also differ.

For a DRO your debts need to be less than £20,000 and you apply through an approved intermediary such as us. There is a fee of £90 for this solution.

An AO is administered through your local county court and the you can’t owe any more that £5,000. You may be asked to pay towards the debts for 3 years at an amount you can afford but it’s likely that any remaining amount will be written off at the end. There is no set up fee for an AO.

Both debt solutions are available for people with very little surplus whose situations are unlikely to improve. The collection process is halted in both cases and the creditors can no longer contact you.

There are lots of debt solutions available so it’s important to get free and impartial advice to find out which is best for you.

47. What’s the difference between an IVA and full and final settlement?

An Individual Voluntary Arrangement (IVA) and a full and final settlement offer are both ways to ways to pay less than your full outstanding debt. However, they are very different debt solutions.

An Individual Voluntary Arrangement (IVA) is a legally binding form of insolvency. You cannot enter an IVA without the assistance of an Insolvency Practitioner.

In an IVA a percentage of your debt is often written off with the agreement of creditors. You would usually be expected to pay a monthly sum to your creditors for a period of between five and six years.

A settlement offer, also known as full and final settlement, is where you offer creditors a lump sum, which can often be less than the outstanding balance. This lump sum is offered as payment to settle the debt.

It’s important when offering full and final settlements that you have the written agreement of creditors before you make the payment. Not all creditors will accept reduced amounts.

If you have received a lump sum and are considering making full and final settlement offers to your creditors it might also be worth considering a lump sum IVA.

48. What’s the difference between a debt management plan and a debt relief order?

There are many ways to deal with your debts if you’re struggling and can no longer afford to maintain the minimum payments. Every person’s situation is different so there isn’t a ‘one size fits all’ solution. Our advice is always based on your individual circumstances.

At StepChange Debt Charity we can advise and offer both debt management plans (DMPs) and debt relief orders (DROs) but they’re very different solutions.

In a successful DMP you would repay the outstanding debt in full and the repayments are set at a rate that you can afford. It’s a flexible agreement that can change at any time. There is no upper or lower limit to the amount you owe, or a set timescale (although it would need to be within a reasonable frame of time to make it a realistic solution).

DMPs aren’t legally binding and don’t take into consideration any assets (unless they can be sold to reduce the term of your DMP). We provide DMPs completely free of charge.

A DRO is a form of insolvency which has set criteria. Provided that you fulfil the criteria your debts are frozen for 12 months and after this your debts are written off. If your situation improves within the 12 months the DRO is revoked and you would be liable for the full amounts once again. Unlike a DMP you can’t have any assets, and the DRO costs £90.

49. What’s the difference between banking with a bank I have debts with, and swapping to another?

It may seem like a strange question to ask, however if you have an unmanageable debt, the little-known legal term “right of offset” might mean who you bank with makes a big difference.

For example, if you have a credit card and current account with the same bank and can’t afford the card repayments, the bank may use “right of offset” to take money paid into the current account – for example your wages – to pay down the credit card debt and even force you into an overdraft, adding to you debts. This can happen without your knowledge.

It’s quite a common occurrence for our debt advisors to receive calls from clients whose entire monthly wage had been seized by their bank to pay debts on connected accounts. We advise clients to swap to a new bank account straight away to avoid this happening.

If you feel this could happen to you please contact StepChange Debt Charity for help, and consider changing to a basic bank account at a separate bank. While it might be a ‘hassle’ to move direct debits and standing orders across to a new account, it could also mean you avoid the stress of losing a whole month’s wages.

50. What’s the difference between hire purchase and a car loan?

If you get a car on hire purchase you don’t own the car until you have made all of the repayments. If you can’t maintain these payments, the lender can repossess the car and you will be liable for the shortfall. If you have paid over a third of the agreement, you may be able to negotiate and keep the car. Or you could hand the car back and not have to pay any more.

If however you buy a car with a finance agreement, you own the car outright as the loan is not secured on the car. If you fall behind on repayments, the creditor can follow the standard debt collection procedure.

You should always read the terms and conditions thoroughly to know what you’re signing for and it’s also worth calculating the amount of interest that you’ll pay to make sure it’s a good deal. Use an online repayments calculator like this one.

51. What’s the difference between a good credit rating and a bad credit rating?

A credit rating is something that people can obsess about but it’s important to remember that each lender looks at an application on an individual basis. There are no standard rules across the industry as to what is “good” and what is “bad”.

As the famous quote goes;

“Those people who can afford a credit card don’t actually need one”

If the bank feels you’re a lower risk – because you pay your credit card on time, your loan repayments are never late and you never approach your credit limit – then you’ll continue to gain good credit. But like a ‘virtuous circle’, you’ll probably not actually need extra money so you’re probably not applying for more credit anyway!

If you need a credit card to live on then it’s more likely you’re more of risk to a card company, and they’ll assess your application accordingly. If this situation applies to you then it would be better to step back. Rather than taking on extra credit card debt, prepare a budget showing all income and expenditure, to work out how to reduce your spending or maximise your income.

In essence maintaining a strong credit report is a balancing act; try to space out any credit applications, try to pay off your outstanding balances, and always pay on time. Credit cards can be handy, but they can also be a big temptation to overspend. Your credit report will reflect this.

For more on credit reports, read the blogpost Make 2012 the year you get to know your credit report, written by James Jones from Experian.

52. What’s the difference between a default notice and a statutory demand?

Both a default notice and a statutory demand are legal notices sent from a creditor. A default notice is a formal letter from your creditors usually sent after three to six missed payments. A statutory demand is a court order that demands payment of a debt in full within 21 days.

The default should state that if you cannot bring the account up to date then you’ll be ‘defaulted’. You’ll usually be given at least 14 days to pay.

If you cannot comply with the terms of the default notice the creditor can then demand the balance of the account be paid in full, begin court action and/or sell the debt onto a debt collection agency. If it is a hire purchase agreement the creditor can start proceedings to repossess the goods.

A statutory demand is more serious than a default notice and could signal that the creditor is about to start bankruptcy proceedings.

If you receive a default notice or a statutory demand you should contact us for debt advice.

53. What’s the difference between a CCJ and a charging order?

Both of these are enforcement actions taken through the court if you’ve fallen behind with your payments. They’re both legally binding and further action can be taken if the conditions aren’t adhered to.

A county court judgment (CCJ) comes before a charging order in the collections process. If you’ve received a default notice, your creditors can apply for one of these at any time. You will know if this has happened as you will receive county court paperwork through the post. It’s important that you respond to this as soon as possible and get advice on what to do if you’re unsure.

The courts act as an intermediary to ensure that you’re making a reasonable offer of payment and your creditor is happy with this. If you don’t maintain the payments as agreed, the creditor can take further action such as bailiffs or attachment of earnings

A charging order is a little further down the line and you must have defaulted against the terms of a CCJ for this to happen. A charging order effectively secures the debt against your property. If there is any equity after the mortgage and any other secured debts are paid, the creditor with the charging order would get their money from any remaining proceeds if you decided to sell.

It’s unlikely that you would be forced to sell the property; it’s more of a security for the lender if you do. You would still be required to make regular payments towards the debt.

54. What’s the difference between having a joint loan and being a guarantor?

If you take out a joint loan with someone, you’re both ‘joint and severally liable’ for the repayment of the whole amount.

That means that if one of you can’t pay, perhaps because of an individual voluntary arrangement (IVA) or bankruptcy, the other is liable for an increased amount of the loan, or even the full outstanding balance.

You cannot avoid the debt because of divorce or separation. For more information read our blogpost We got a joint loan, now we’ve split who has to pay.

Being a guarantor on a loan is different, but if there’s a repayment issue the outcome could be the same.

When you become a guarantor you usually don’t have to pay back the loan. However, if the person who loaned the money can’t repay it falls to you to pay it back instead.

A creditor will usually ask for someone to be a guarantor when they think there’s a risk in lending money.

The rule to remember is this: don’t take out a joint loan or act as a guarantor unless you’re in a position to be able to afford to repay the whole loan.

55. What’s the difference between a consolidation loan and a debt management plan?

A debt management plan or DMP is an informal solution between you and your creditors normally taken out when you cannot afford to make the contractual payments on the debts.

A DMP is usually overseen by a third party who distributes your surplus income to your creditors for you. Some companies charge a fee for this service but we do this free of charge.

A debt consolidation loan is where you take out one large loan to pay off other smaller debts. These loans can sometimes be secured on any property you may own.

It is important that you understand how much you will pay for the loan in full. If you extend the loan over a longer term than your original debts you will be paying more in interest and so increasing the amount of debt you have.

Before taking out a consolidation loan you should read our article to debt consolidate or not to debt consolidate. You should also seek free and impartial a debt advice by using our online debt advice service Debt Remedy.

56. What’s the difference between bankruptcy and an IVA?

Both bankruptcy and Individual Voluntary Arrangements (IVAs) are legally binding forms of insolvency but bankruptcy is the more severe solution.

In an IVA you can protect am asset such as a house, and it is carried out through an Insolvency Practitioner. It can last between 5 and 6 years depending on your situation. The creditors usually get a better return but a certain percentage must agree to the solution before it goes ahead. There’s no need to attend court as the IP is licensed to give it the go ahead.

In bankruptcy, it’s likely that you would lose any assets. In this instance it is overseen by an official receiver and you are usually discharged after 12 months (this can be longer in particular circumstances). If you have surplus money available you could be asked to pay into the bankruptcy for up to 3 years.

The creditors have no say in whether the bankruptcy can go ahead – this decision lies with the district judge. You need to attend court to petition for your own bankruptcy so it can seem like a more formal solution.

All our Debt Advisors are trained in advising on both solutions so you can phone us or use Debt Remedy if you think one of these options might be for you.

57. What’s the difference between secured and unsecured lending?

There’s often confusion between secured and unsecured lending. This is partly because people think that if they’ve borrowed money it’s come from the same bank. However there’s a big difference.

Basically, secured lending is secured against a property, usually a house (but can be a car). Obviously unsecured lending isn’t secured against a property. Therefore it follows that secured lending is only available to those people who own a property or have a mortgage.

This means that should you not be able to pay back the money on a secured loan your property is at risk from repossession. This is why secured loans are much more risky, and any secured debt is seen as a priority, to keep a roof over your head.

Conversely, if you can’t pay back an unsecured loan (or you default on a loan) your credit file will be negatively affected as creditors have to follow the standard debt collection process. However, be aware that sometimes the creditor can go for a charging order, to make an unsecured debt secured.

Whether your debt is secured or unsecured, if you can’t pay back a loan it’s best to use Debt Remedy or phone us as quickly as possible.

58. What’s the difference between token payments and a debt management plan?

If you can no longer afford to make the contractual payments to your creditors the first step is to put together a budget.

Once you have budgeted for all essential costs the money you have left over can be used towards paying your creditors.

There are many debt solutions available such as Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs) Debt Relief Orders (DROs) or Bankruptcy. These solutions are partly dictated by the amount of surplus income you have left over to pay your creditors amongst other factors.

A debt management plan is an unofficial arrangement with your creditors where you pay what you can afford toward the debt. A DMP is usually done through a third party who distribute the money to your creditors on your behalf. Some companies charge a fee for this service, we do this for free.

Many creditors see a DMP as a viable long term solution to repay the debt in full. Some will suspend interest and charges on the debts (although this is not guaranteed).

If you don’t have enough surplus for a DMP you may have no choice but to make token payments to creditors. A token payment is a small amount paid monthly which shows you are acknowledging the debt and not trying to avoid it.

Token payments are not usually a long term debt solution but can be used in the interim period between your situation improving or as a stop gap between other debt solutions such as bankruptcy.

59. What’s the difference between a debt collector (debt collection agent) and a bailiff?

With unsecured debts a creditor (a bank, for example) can send a debt collection agent out to your property; these are sometimes referred to as “doorstep collectors”.

Doorstep collectors have no more power than someone calling you on the phone and are not the same as a court-appointed bailiff.

Debt collection agents are often threatened but rarely used due to the expense of sending agents out when it’s cheaper to phone and/or write to someone.

On the other hand a bailiff is sent by the court when a court ruling has not been adhered to, such as a county court judgment (CCJ). With unsecured debts only a court can instruct a bailiff, not a creditor.

Although it’s immoral, some creditors will threaten bailiffs without making it clear that they would need to take court action first, and that a bailiff would only be called in when the court action hasn’t been successful.

If you are worried about creditor action, get instant debt help online now by using our online debt advice service Debt Remedy.

Posted by StepChange MoneyAware in Living with debt

10 Apr 2012