Priority Debts

Some debts we must pay. No matter what our financial circumstances we must give priority to food and shelter. We must eat and drink, have somewhere to live and have clothing, heat and light. After that, all our debts have a lower priority.It follows then that payment of the mortgage or rent, payment of utilities such as heat, light and water and payment for food and clothing for our family must rank ahead of all other bills. These are the ‘must-pay’ bills because they are for the ‘must-do or ‘must-get’ items. We cannot afford to become homeless and risk being put out on the street. We cannot afford to have our heat and light utilities cut off. We cannot live without food, drink and clothing.

Financial CrisisIn real life however, we tend to pay the creditors who send us the most threatening letters or phone us most frequently or aggressively or who call to our home or who shout the loudest. We make pressurized decisions but are they the right ones? The right approach is to compile a household budget for our family. How do we go about that task?

Write down the items with a ‘must-pay’ tag and the monthly cost of those. Write down the household income. Include all sources of income – wages, salaries, benefits income, allowances, rental income from lodgers if any, dividend income if any, tax credits, housing benefit, contributions from family members who are working even part-time and so on. This provides the bones of an Income and Expenditure Statement (I&E). Now we list the cost of the less essential living expenses.

Thus we can simply work out how much money is ‘left over’ to pay off our loans, credit cards, overdrafts and other unsecured debts. We call this ‘money left over’ our family disposable income, sometimes called the surplus or just D.I. If our DI is big enough to service all of our unsecured debts (paying the contractual monthly amounts of course), we should have no problem. If it is insufficient, the tricky bit is firstly to calculate how to split it up fairly between all our creditors and secondly to reach agreement with each creditor on the amount of our monthly payment to them.

If we are unable to do this, then our next move should be to seek professional advice. We can set up a meeting with CAB and their advice may include referring us to a government debt advice agency or to a charity debt advice organization or to a reputable Insolvency Practitioner or IP who can determine whether we are insolvent or not by assisting us to compile an accurate and complete I&E Statement and calculate our DI. Many IPs do not charge a fee for such initial advice. The IP can also explain what financial options are open to us and which is most likely to be suitable for our particular circumstances. These options could include a Debt Management Plan, Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Administration Order, Debt Consolidation or some other financial solution. We can make up our mind if we want to proceed with one of these solutions. We have to commit to nothing at this point and can walk away and ‘sort out’ our own finances.