What are ‘Creditors’?
The term ‘creditor’ is used to describe anyone who has lent money to you, which you still need to pay back. In this context, creditors are likely to be any or all of the following examples:
- Your bank – for overdrafts and/or personal loans which could be either secured or unsecured.
- Credit card companies – for example Barclaycard, CitiCard etc
- Store Cards – often issued by GE Finance but on behalf of many of the larger High Street stores such as Debenhams, New Look etc
- Catalogues and Mail Order businesses – such as Littlewoods, ARGOS etc
- Door step lenders – e.g. Provident Finance
- Charge Cards – such as American Express
- Pay Day lenders – Wonga etc, who lend money against repayment when you receive your wages.
- ‘Secondary’ lenders – those lenders not commonly found on the High Street, and usually trade through the internet, granting personal loans at higher interest rates
- Hire Purchase finance – such as Blackhorse Finance
These are just a small sample of the types of creditors we come across in our normal day to day activities, but generally cover most of the outstanding debts seen with our clients.
Self Employed People
However, with clients who are trades people and self employed, we can also add to this list, to include:
- Trade creditors – people or businesses from which goods and services have been supplied on the understanding that payment for these goods/services is made at an agreed later date. Most businesses, particularly small businesses, rely upon such arrangements in order to support their ongoing trading as banks tend to adopt tighter lending policies for these businesses.
- VAT – The HM Revenue & Customs (HMRC) generally allow businesses to pay their VAT liabilities on a 3 monthly basis which allows the business to use the collected cash during this period to support their trading. During this period, HMRC is a creditor of the business.
- PAYE/National Insurance Contributions – the employer deducts from staff wages the amount they have to pay in income tax and NIC, which is sent to HMRC in the following month. During this period, HMRC is a creditor of the business.
Finally we also come to those arrangements as individuals or businesses which we make with anyone where it is agreed that payment can be made over a period of time instead of by a single payment ‘up front’. These would include items such as Council Tax or car/house insurance paid on a monthly basis – each of these liabilities covers usually a 12 month contractual period, though the council or insurer is happy to receive monthly payment as a way of easing the pain!
What can creditors do?
It is important to divide your debts into priority and non-priority debts. Why? – Because you need to understand which debts need to be paid first as a result of the potential consequences of not doing so. Many people get into difficulty because they pay the wrong creditors first.
Priority debts are debts that could result in your losing your home or an essential supply, if they are not paid
Below is a list of debts that are usually regarded as priority, and why they are a priority.
- Rent or Mortgage and secured loans – Lender or landlord can repossess the home
- Council Tax – Council have quite wide recovery options – they can use bailiffs, obtain payment from ‘attachment of earnings or benefits’ or, as an extreme, apply for your committal to prison
- Electricity and Gas – The Supplier may obtain permission to disconnect supply
- Magistrates’ Court Fines – Bailiffs can be sent to collect unpaid fines, refusal to pay can result in imprisonment. Re Maintenance arrears/CSA, Bailiffs can be instructed or there could be deduction from earnings, or committal to prison
- HP/conditional sale, rented and hired goods – Goods may be repossessed
- Business Rent – Repossession of premises
- Business Rates – Bailiffs, committal to prison
- Income Tax/VAT – Bailiffs, committal to prison (for evading payment)
- TV Licence – Fine of up to £1000
Other items to consider
- Water charges – Water companies may no longer disconnect supplies to enforce payment, but payment of water bills must still be regarded as an essential.
- County court orders – If you have been ordered to pay a debt via a county court order. However courts will take into account someone’s ability to pay a debt. If you cannot afford to pay, see the section on county court judgments for how to deal with this.
- Insurance (especially of your car and home) – Car insurance has to be paid by law, but insuring your home can be overlooked as an essential item; if you are uninsured however, you could lose everything through fire or theft.
Always remember to check if you have any insurance policies (payment protection policies) that will help you to pay your mortgage or other form of borrowing in the event of illness, disability, redundancy etc.
What is the difference between ‘secured’ and ‘unsecured’ creditors?
Secured creditors are those who have the benefit of a mortgage (typically over your house) or some form of right to hold or sell specified, separately identifiable assets, which they can rely upon to raise sufficient funds to clear your outstanding debt. This would occur in the event of you defaulting on your responsibilities to repay the debt, in accordance with the loan agreement.
An example of a secured creditor would be in respect of hire purchase – for example where you obtain a new car through a dealership – where the car is the security against the finance provided.
Similarly, secured loans are usually lent against a mortgage on your house, which could be sold by the lender under the mortgage document if you fail to repay the loan.
Bank overdrafts, credit cards, store cards and catalogues/mail order debts tend to be unsecured creditors, with no formal rights to sell your assets to clear the outstanding debt without first recourse to the courts. Typically you will find that interest charges on such debts will be higher because of the perceived greater risk to the lender of the debt not being repaid.
If I was in financial difficulties, should I pay some creditors before others?
Here’s the issue to consider that you need to ask yourself:
- Am I at risk of losing my home or items I need to ensure I and my family can live ‘reasonably’?
The most important creditors must be those that are secured. Failure to repay them or at least to come to an agreed payment programme which keeps these creditors onside is likely to place your property secured to them at risk of being sold by them to clear the debt. You may recall the secured lender, whilst taking a mortgage over your house, stating “YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE”. This should not be taken lightly; we have had many clients coming to us after their house has been repossessed, often finding that they still owe some money after the property has been sold!
At the same time, it is important to maintain payments to ‘Priority Debts’ as there are potential risks involved in not doing so, ranging from repossession of property to fines and at the extreme, possible prison sentences. In any event, non payment of priority debts will have an impact upon life at home.
Of least impact upon keeping a roof over your head and food on the table are the ‘Non Priority’ debts. Such creditors do not have the luxury of holding any form of security for the debt, and therefore do not have as much leverage to ensure you comply with their terms. Of course you still have an obligation to pay back such debts, but you may find creditors more amenable to setting up arrangements so that you pay a smaller amount each month, over a longer period.
What happens if the debt is in more than one name?
It is not unusual for loans to be taken out in the joint names of husband and wife etc, particularly where the house is owned in the joint names, and certainly where lenders are looking for the security of the house, they will require all owners to be a party to the loan. Similarly many couple will take out unsecured loans together so that both of their incomes can be taken into account by the lender when calculating if repayment is viable.
In most cases, loans in joint names are on the basis that each borrower is ‘jointly and severally’ liable for the debt. This means that each individual takes full responsibility for the overall debt – not just their half. This means that if, for example, the couple split up and one did not make any further payments and could not be traced by the lender, the lender could call upon the other to clear the debt. That may sound unfair on the individual who is committed to do the right thing, but unfortunately that’s the way it is!
The Limitation Act 1980 – Know your rights