Priority debts

• Types of debt
• Sanctions and client needs
• Dealing with priority debts

It is important for an adviser to understand and explain to a client the difference between priority and non-priority debts. Priority debts are dealt with differently from non-priority debts because of the actions (sanctions) a priority creditor can take.

Types of debt

Priority debts carry the most serious consequences if a client does not pay them, and this can lead to severe penalties for the client. Non-priority debts are still important and must be addressed but have less serious consequences for no payment.

Priority debts include mortgage, rent, court fines, council tax, TV licence, child maintenance, any loans secured against a client’s home, fuel bills and hire purchase agreements for essential goods and services.

Sanctions and client needs

Non-payment of a priority debt may result in the client losing access to an essential service, their home, or imprisonment.

An adviser decides on the priority of debt through two rules:

•sanction of the creditor; and
•client need.

The sanction of the creditor is the action they can take against the client. The following are sanctions for different types of debt:

•mortgage or secured loan – repossession of client’s home;
•rent – eviction;
•council tax – money taken from wages or bank account, bankruptcy or debt secured against the client’s home, client’s assets taken from their home;
•child maintenance – client’s assets are taken from their home, money taken from wages, bank account or benefits received, imprisonment;
•criminal fine – client’s vehicle impounded, money taken from wages, bank account or benefits received, imprisonment;
•tax, VAT or national insurance – client’s assets taken from their home, money taken from client’s bank account, client’s PAYE tax code adjusted to recover debt, bankruptcy;
•decree – client’s assets taken from their home, money taken from wages or bank account, or debts secured against client’s home;
•TV licence – client receives a criminal fine;
•gas or electricity – client faces services being disconnected, decree, money taken from benefits received;
•hire purchase – client faces repossession of goods;
•telephone – client’s phone line is disconnected.

Advisers must take into account the needs of the client and whether the creditor sanctions will have an adverse effect on those needs. This could be because of the creditor’s importance to them (such as a debt to a family member) or because they believe the goods or services are essential (such as a telephone for a housebound client).

Dealing with priority debts

Priority creditors are paid first from the client’s available disposable income. All other creditors take a share of the pro rata calculation from the remainder of the client’s disposable income when the amount to be paid to priority debts has been agreed.

Immediate contact should be made with the creditor. If an immediate definite offer of payment is not possible, the adviser should ask the creditor for more time and for no further action, or for existing action to be suspended during this period. The client should be advised to continue paying towards their current liability, if possible – eg, pay ongoing rent charge while negotiating payments for arrears.

The client may be unable to make payments towards all their priority debts and will need to decide which priority debts are of most importance.

When considering how to deal with priority debts, an adviser should work through the following tasks:

•for secured loans, hire purchase/conditional sale agreements, the adviser should check whether the client has payment protection insurance which may cover repayments;
•for secured loans, hire purchase/conditional sale agreements, the adviser should also investigate whether the creditor followed the appropriate regulator’s guidance to assess the client’s ability to repay – if not, the debt may be challenged;
•for tax or VAT, the adviser should consider what enforcement is likely to be used and the effect on the client.

 

Calculation

The calculation is done by negotiation with the priority creditors, not on a pro rata basis (although you can ask them to accept a pro-rata payment).

Example

Jack’s disposable income is £100 a month.

His adviser has negotiated a payment of £30 a month for the priority creditor, leaving £70 for the non-priority creditors.

Creditor	Balance	Payment offer
Creditor 1 (priority)	£500	£30
Creditor 2	£500	Pro rata
Creditor 3	£2,000	Pro rata
Creditor 4	£500	Pro rata

 

Creditors 2, 3 and 4 are offered a pro rata amount based on the remaining disposable income of £70.