Non-priority debts

• Types of non-priority debt
• Dealing with non-priority debt

Types of non-priority debt

The most common non-priority debts an adviser may deal with include:

•overdrafts;
•personal loans;
•bank or building society loans;
•money borrowed from friends or family;
•credit cards, store card debts or payday loans;
•catalogues, home credit or in-store credit debts.

Non-priority debts have less serious immediate consequences for non-payment than priority debts.

They are still important and need addressing, as they are often the majority of a client’s debts. Note that non-priority creditors can eventually decide to take sheriff court proceedings against the client to deal with non-payment and enforce the judgment through the courts.

Dealing with non-priority debt

All non-priority creditors should be treated fairly. The client should not make full payments to one creditor while reducing payments to another.

There are several options available to deal with non-priority debt.

 

Token payment

When the client has little available income, no assets or capital and their situation is temporary, it may be necessary to offer payment by instalments of a token nature. This can satisfy the administrative system of a creditor and prevent them from taking further action. A token payment is usually £1 a month; larger amounts such £5 or £20 may be regarded as token payments by some creditors as the debt will never be repaid at that rate. This tactic can be used as a delaying tactic until the client’s situation improves or another debt solution is chosen.

 

Freeze interest

When a repayment schedule of less than the original contractual payment is planned, or if the client cannot afford any payment at the moment, a request should be made to freeze all interest and other charges associated with the debt. This strategy should be used in combination with another strategy in the long term.

 

Informal moratorium

If the client has no money available for non-priority debts, the creditor should be asked to accept no payments for a three- or six-month period, after which the situation can be reviewed. If a request is made to a creditor to withhold action and accept no payments, they must be asked to stop interest/charges at the same time to prevent the debt from increasing.

 

Pro rata payments

If the client cannot afford the minimum payment to any of their non-priority debts, they should make a reduced payment to all of them using a pro rata calculation. This option is available if a client has disposable income, a number of debts and no assets. The client’s income should be distributed among all the non-priority creditors in a fair way. The amount of each instalment is directly proportionate to the total amount owed to that particular creditor.

Example: individual debt, divided by total debt, multiplied by the disposable income

Jack’s disposable income is £70 a month. (See the priority debt example here.)

 

Creditor	Balance	Payment
Creditor 2	£500	£500 divided by £3,000 x £70 = £11.67
Creditor 3	£2,000	£2,000 divided by £3,000 x £70 = £46.67
Creditor 4	£500	£500 divided by £3,000 x £70 = £11.67
Total debt	£3,000