A debt is paid back with an agreed premium interest rate over time, or all
at once at a later date - called "balloon payment."
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Which debt should be payed first?
When you're sorting out how to pay back your debts, you'll need to identify the priority debts. This will mean you can use your available money to settle the most important debts first.
Priority debts
The most important debts aren't necessarily the biggest ones. Priority debts are ones where serious action can be taken against you if you don't pay what you owe.
Some examples of priority debts, and the consequences of not dealing with them:
Mortgages - If you don't keep up with mortgage payments, the mortgage lender can take legal action to take possession of your house and sell it, for whatever price they want. If the price they get is less than the remaining debt you'll still be liable for the balance.
Rent - If you fall behind with your rent, your landlord can evict you (and still take you to court for the money you owe).
Tax - Not paying tax can lead to you being made bankrupt or going to prison.
Utility bills - Gas and electricity companies can disconnect their services to your home if you don't pay their bills. Even a phone bill can be a priority if you need the phone to help you earn your living.
Hire purchase (HP) debt - Any debt should be seen as a priority if what you're buying on credit (or 'HP') is essential - such as buying a car you need for getting to work.
Other priority debts
- Council Tax or Business Rates
- court fines
- maintenance and child support payments
If any of the said debts are unpaid, a court could use bailiffs to come into your home and take your goods away. Your goods would be sold to pay what's owed. If, after this, you still owe money, there's a possibility you might be sent to prison.
Non-priority debts
You may not lose your home or go to prison for not paying 'non-priority' debts, but you can still be taken to court and ordered to pay what you owe - often with extra costs on top. If you still don't pay after you've been ordered to do so, bailiffs can be used to seize your property.
Examples of non-priority debts include:
- credit card or store card arrears
- catalogue arrears
- bank overdrafts and loans
- benefit overpayments
- money borrowed from friends or family
- non-essential goods bought on hire purchase (HP)
However, any debt that results in bankruptcy proceedings is the highest priority. Once bankruptcy starts, any leeway your other creditors gave you will disappear as they try to protect their debt from the other creditors - it's very important to respond to any court claims as soon as you can and get advice.