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- When you are completing an Income & Expenditure Statement, and you have worked out how much you need to live on, you need to distribute any amount left over between your creditors.
- The first step is to judge how many of your creditors you can pay something to. To do this, make a list of all of your priority creditors (Example 1) and another list of your non-priority creditors (Example 2) from your Income & Expenditure Statement.
| Example 1 - Priority Debts |
| |
Amount Owed |
Monthly Payment |
| Mortgage Arrears |
£3500.00 |
£35.00 |
| Gas Arrears |
£550.00 |
£5.50 |
| Maintenance Arrears |
£1200.00 |
£12.00 |
| Council Tax Arrears |
£750.00 |
£7.50 |
Total |
£6000.00 |
£60.00 |
| Example 2 - Non-priority Debts |
| |
Amount Owed |
Monthly Payment |
| Credit Card |
£2000.00 |
£2.00 |
| Hi-fi Hire Purchase |
£800.00 |
£1.00 |
| Catalogue |
£30.00 |
£0.00 |
| Unsecured Bank Loan |
£1750.00 |
£2.00 |
Total |
£4580.00 |
£5.00 |
- From the Income & Expenditure Statement obtain the figure for 'Money for Creditors' (figure 'C' on the statement). We will assume this figure was £65.00 for our example.
- We now need to attempt to create a 'moratorium' with your creditors. Being, a delay granted by your creditors in the repayment of the debt, and all of your creditors refraining from debt recovery action: if you maintain your side of the agreement.
- As we only have £65.00 per month, and your priority debts will only receive a small payment, it does not look possible to pay any amount to your non-priority debts (in our example). However, you can decide to pay your non-priority debts a token figure until you can increase the payment. In this example, I have used £5 of our money to pay three creditors a small amount each. You will note that one creditor with a £20 debt has no payment: with respect to all creditors, this small amount cannot justify even a token payment (let alone the cost to the creditor to process any payment). A letter needs to be sent to all small creditors asking for them to write off the debt, or at least for them to do nothing as there is little, or no, likelihood of payment (see Example 3).
- We now have £60 for priority debts. A system exists and is accepted by most creditors. The amount is worked out as a ratio of amount of debt to payment available. One debt at a time is calculated as follows:
Amount
Available |
x |
Amount of Debt |
÷ |
Total
Debt |
= |
Payment |
£60 |
x |
£3500 |
Mortgage Arrears |
÷ |
£6000 |
= |
£35.00 |
£60 |
x |
£550 |
Gas Arrears |
÷ |
£6000 |
= |
£5.50 |
£60 |
x |
£1200 |
Maintenance Arrears |
÷ |
£6000 |
= |
£12.00 |
£60 |
x |
£750 |
Council Tax Arrears |
÷ |
£6000 |
= |
£7.50 |
Total |
= |
£60.00 |
| Example 3 – Letter to Small Creditors |
Dear Sirs
Ref. Creditor: XYZ Supply Co. Account Number: 12345 Amount Due: £20.00
I regret to inform you that due to my poor financial situation I cannot pay the amount due to you.
I have enclosed a copy of my Income & Expenditure Statement and you will note the seriousness of my situation.
| (Use only one of the following paragraphs; delete the reference to interest charges if this is not relevant)
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I ask that you accept a payment of £1.00 per month until the debt is paid or my situation changes. I also request that interest charges be frozen to ensure the reduction of my debt. Please confirm acceptance of my offer, and I will send the payment by return.
| (When you receive acceptance arrange to pay them, say, £3 by cheque, order etc. State that this is three months payment: your reason being that the cost of sending monthly payments is out of proportion with the payment, and is easier and cheaper for their administration.)
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I ask that you consider writing off the debt due to my inability to pay any amount towards reducing the debt. I do not see my situation changing in the short to medium term and I ask for your understanding in this matter. If you will not write off the debt, I ask that you take no further action and I will write to you every six months with an update of my situation.
Please consider my request (or offer) carefully, and accept my thanks for your anticipated support.
Yours sincerely/faithfully
| (depending how formal you want to be: I prefer ‘sincerely’)
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Remember you need your creditors support, large and small alike. Being sued for £60 is no less stressful that being sued for £6000.
- If one of your creditors decides to ‘go it alone’ and take legal action, you need to consider one of the forms of personal insolvency. This ranges from getting the courts support and protection for a moratorium (as above), to the extreme of personal bankruptcy. In such circumstances either contact (in the UK only) the Consumer Credit Counselling Service on 0800 138 1111 or your accountant.
- Still communicate with, and make offered payments to all creditors regardless of their ‘chest beating’, most will soon accept the inevitability of your payment arrangement.
Many thanks to Colin Duguid of Credit to Cash Credit & Debt Management Ltd who is taking the time to provide this information as a service to homeworkers.
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