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Debt Advice Handbook 14th edition

2. The general approach to priority debts

• Prioritise the debts
• Consider the options
• Points to note

Priority debts must be dealt with quickly and effectively. General rules about how this should be done are outlined in this section. There are also specific ways of dealing with particular types of debts (see here–here).

Prioritise the debts

Immediate contact should be made with the creditor. If it is not possible to make a definite offer of payment immediately, ask for more time (eg, 30 days) and ask the creditor either to take no further action or to suspend any existing action during this period. If possible, the client should be advised to pay at least the current instalments in the meantime.

Generally, it is not appropriate to make offers to priority creditors on a pro rata basis (see here) or to include priority debts in a debt management plan (see here), and you must negotiate with them individually. It must first be decided whether to make payment:

•either as soon as possible; or
•over as long a period as possible.

Clients may not be in a position to make payments towards all their priority debts and so they will need to prioritise their priority debts. In this situation, it is particularly important to consider income maximisation and financial capability options (see Chapters 3 and 7). The following should be taken into account.

•If the debt is accruing interest or charges, it may be in the client’s best interests to pay it off quickly.
•It might be in the client’s best interests to pay off a small priority debt as soon as possible.
•The creditor’s collection policies may be important – eg, a local authority’s policy may be to send council tax liability orders straight to bailiffs, which increases the debt.
•The creditor may insist on arrears being cleared before the next bill is due to be delivered or payment made.
•If the client is currently earning above her/his average wage, it may be in her/his best interests to make higher payments while s/he can.
•If capital or lower cost finance is available, the debt can be cleared more quickly.
•The client’s age or state of health may lead to a reduction in income. It could be in her/his best interests to make a payment before this happens.
•If the client is considering moving, it may be necessary to make a payment before doing so.
•If the client has any non-priority debts, usually s/he must make some provision for these (see Chapter 9).

You should also further prioritise the debts in the light of:

•what the client wants;
•the existence of more than one priority debt;
•the severity of the sanction available to the creditor;
•the potential consequences of using a particular strategy;
•the stage the recovery process has reached.

Consider the options

Although the decision to give one debt priority over another is to some extent a subjective one, you should always discuss with the client the range of options available and the possible consequences. Work through the following list of tasks.

•In the case of secured loans, hire purchase/conditional sale agreements and loans secured by bills of sale, check whether the client has payment protection insurance to cover the repayments in the event of sickness or incapacity, unemployment, accident or death. If the client does have insurance and her/his situation is covered by the policy, advise the client to make a claim. If the claim is refused, consider whether this can be challenged and/or also whether the policy may have been mis-sold (see here). If the client’s situation is not covered by the policy, also consider whether the policy may have been mis-sold – eg, the client’s circumstances were such that s/he could never have made a claim. If the agreement is regulated by the Consumer Credit Act 1974 and the client says that taking out payment protection insurance was a condition of being granted the credit, the agreement may be unenforceable (see here).
•In the case of secured loans, hire purchase/conditional sale agreements and loans secured by bills of sale, investigate whether the lender complied with its duty to assess the client’s ability to repay in accordance with guidance produced by the appropriate regulator – eg, the Irresponsible Lending Guidance produced by the former Office of Fair Trading (if the loan was made before 1 April 2014), section 5 of the Financial Conduct Authority’s (FCA’s) Consumer Credit Sourcebook (if the loan was made after 1 April 2014) or sections 11 and 11A of the FCA’s Mortgages and Home Finance: Conduct of Business Sourcebook (if the secured loan is a regulated mortgage contract made on or after 21 March 2016).
•In the case of tax, VAT or tax credit overpayments, consider what method of enforcement HM Revenue and Customs (HMRC) is using or threatening to use. Bear in mind in the case of tax credit overpayments that recovery from an ongoing award or by amending the client’s pay as you earn (PAYE) code reduces the amount of surplus income the client has available to make offers to other creditors.
•Consider whether the client has any other grounds for challenging either the debt or the creditor’s conduct (see Chapters 5 and 6).
•Phone the creditor as soon as possible, even if s/he does not have all the necessary information on which to base a strategy. This may help prevent further action and alert the priority creditor to the involvement of an independent agency. Invoke the 30-day ‘breathing space’ provisions referred to in the Consumer Credit Sourcebook.1FCA Handbook, CONC 7.3.11R and 7.3.12G
•If necessary, take emergency action to prevent the immediate loss of home, liberty, essential goods or services (see here).
•Negotiate the amount, manner and time of repayments.
•Ensure the client is clear about who to pay, when to pay and how much to pay.
•Encourage the client to seek further assistance from you if s/he is facing practical difficulties with repayment arrangements.
•Monitor the initial strategy with the client. If the client’s circumstances change or the original strategy is unsuccessful, you and the client must decide whether to adopt a new strategy or whether the details of the original strategy can be modified.

Consider carefully the amount of income included as ‘available’ to the client. The fact that a debt is priority may influence the way in which a partner’s income is treated. A partner may not wish to pool her/his income and liabilities if only non-priority debts have been accrued (and there is no need to – see here). However, if serious consequences, such as loss of home, could be experienced by the client’s partner, s/he may wish to contribute towards repaying a debt for which s/he is not legally liable. This situation can also occur when a debt arose while someone was with a previous partner.2See P Madge, ‘Till Debt Do Us Part’, Adviser 71

 

1     FCA Handbook, CONC 7.3.11R and 7.3.12G »

2     See P Madge, ‘Till Debt Do Us Part’, Adviser 71 »

Points to note

•Although many priority creditors have their own collection policies which act as guidelines for their officers, these can always be negotiated. A refusal to negotiate could give rise to a formal complaint.
•It may be necessary to contact someone in a position of authority within the relevant organisation before policies can be changed.
•Accounting periods, such as local authority financial years or other periods between quarterly bills, should not be taken as absolute dates by which current liabilities must be met.
•Lenders of secured loans often argue that arrears should be repaid in short periods. However, in an important decision, the Court of Appeal suggested that a reasonable period to clear arrears might be the whole of the remaining term of the mortgage.1Cheltenham and Gloucester v Norgan [1996] 1 All ER 449 (Adviser 53 abstracts) So, if a possession action was started half way through a 30-year mortgage, it would be possible for the court to suspend an order on payment of an amount which would repay the mortgage together with the arrears over the next 15 years. On the other hand, if the secured loan is a regulated mortgage contract treated as regulated by the Consumer Credit Act 1974, the client may be able to apply for a time order (see here and here). The lender should also have complied with section 13.3.2AR of the FCA’s Mortgages and Home Finance: Conduct of Business Sourcebook. This requires the lender to make a reasonable effort to come to an agreement with the client to pay the arrears over a reasonable period (in appropriate cases, the remaining term of the mortgage) and, if no reasonable payment arrangement can be made, allow the client to remain in possession for a reasonable period to organise a sale, and to repossess the property only if all other reasonable attempts to resolve the position have failed.

The client should be advised to:

•start making payments immediately when the strategy has been decided, as this encourages the creditor to accept the arrangements; and
•where possible, set up a direct debit or standing order to ensure a payment arrangement is kept.

Creditors should be asked to confirm the agreed strategy in writing. They may often require a financial statement (see here), list of debts and written proposal before providing such confirmation. However, a delay in providing confirmation is not a reason for withholding agreed or offered payments.

 

1     Cheltenham and Gloucester v Norgan [1996] 1 All ER 449 (Adviser 53 abstracts) »