Priority & Non-Priority Debts

Not all debts are created equally. This article looks at the differences between priority and non-priority debts. The distinction is incredibly important.

Non-priority debts are those debts for which creditors (the people to whom you owe money) have far less power to enforce. Usually such creditors will have to pursue the debt through the courts if they wish to enforce them.

Whether priority or non-priority, debts should NEVER be ignored. If you are suffering financial hardship, it is imperative that all creditors are informed of this. 


Priority debts
Priority debts are so-named because repaying these debts needs to come before anything else. Such priority debts often have dire consequences such as the loss of utilities, repossession of your property, or even imprisonment.
 
Priority debts must be paid, and the consequences for not doing so can - as mentioned above - be severe. If you cannot afford to make payments in full, it is vitally important that the creditor is contacted and informed of your financial circumstances. It will usually be possible to arrange for a lower monthly payment.

So what types of debts are priority debts? Priority debts include (but are not necessarily limited to):

• Mortgage payments.
• Rent arrears.
• Secured loans.
• Council tax arrears.
• Income tax and/or VAT arrears.
• Utilities arrears (other than water rates).
• Fines imposed by the magistrates' court.
• Child support / child maintenance arrears.
  

Clicking on each link above will take you to a further page which looks at the action you could take with regard to each type of debt. 

Remember, the general rule is that a priority debt is defined its potential consequences. The creditors that shout the loudest aren't always the creditors with the most power.


Non-priority debts
Non-priority debts are those which don't fall into the definition of priority-debts and include things such as:

• Unsecured loans.
• Credit cards.
• Store cards.
• Catalog debts.
  

Make no mistake that non-priority debts are, non-the-less, important and must not be ignored. However, non-priority creditors have to go to much time and expense if they wish to claw back money they are owed. For this reason, it is more likely that non-priority creditors will be amenable to accepting lower repayments.

Conclusion

If you don't have enough money to go around, it's important to know which creditors you should be giving priority to paying. If you fall into financial difficulty, it's important that ALL creditors are informed immediately so that negotiations can begin.

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NB: If you are in severe financial difficulty and feel overwhelmed by your debts, visit your local Citizens' Advice Bureau. Many CAB's receive special funding to provide debt caseworkers who can deal with your matter from start to finish. Further, the CAB and organizations like it have greater bargaining power when it comes to negotiating lower payments.

Dealing with priority debts: mortgage arrears

YOUR PROPERTY CAN BE REPOSSESSED IF YOU DO NOT PAY YOUR MORTGAGE.

If you're in arrears with mortgage repayments, you should contact your lender as soon as possible.


Making contact
Though it is becoming increasingly rare, it is worth checking if you have mortgage protection insurance: this will usually cover periods when you are unable to make payments due to circumstances outside of your control.

When you contact your lender, you should explain why you have failed to make your payments (the circumstances that have led to your financial difficulties) and how you intend to pay them (for example, paying smaller instalments).

You may be able to negotiate with your bank to make smaller monthly payments. Alternatively, you could suggest that the amount of the arrears is added to the original sum borrowed and, thus, becomes part of the amount borrowed (however, this would have the effect of increasing your monthly repayments to take account of the additional sum).

Some lenders will impose financial penalties for late payments, or ongoing penalties over the term that payments are in arrears. If this is the case, you should request that your lender waive these charges for the time being.


Additional considerations
If you are in receipt of any of the following benefits, you may be entitled for payments to be made on your mortgage interest. 

• Job Seekers' Allowance
• Income Support
• Guarantee credit of Pension Credit

Note that only the interest is paid by such benefits, and is paid directly to the lender.

Dealing with priority debts: secured loans

YOUR SECURED ITEMS CAN BE REPOSSESSED IF YOU DO NOT PAY YOUR SECURED LOAN.

If you're in arrears with repayments for a secured loan (where the security is something other than a property), you should contact your lender as soon as possible.


Making contact
Though it is becoming increasingly rare, it is worth checking if you have payment protection insurance: this will usually cover periods when you are unable to make payments due to circumstances outside of your control.

When you contact your lender, you should explain why you have failed to make your payments (the circumstances that have led to your financial difficulties) and how you intend to pay them (for example, paying smaller instalments).

You may be able to negotiate with your bank to make smaller monthly payments. Alternatively, you could suggest that the amount of the arrears is added to the original sum borrowed and, thus, becomes part of the amount borrowed (however, this would have the effect of increasing your monthly repayments to take account of the additional sum).
 
Some lenders will impose financial penalties for late payments, or ongoing penalties over the term that payments are in arrears. If this is the case, you should request that your lender waive these charges for the time being.


Additional considerations
If you are in receipt of any of the following benefits, you may be entitled for payments to be made on your mortgage interest. 

• Job Seekers' Allowance
• Income Support
• Guarantee credit of Pension Credit 
  
  

Note that only the interest is paid by such benefits, and is paid directly to the lender.

What is a bond?

The term 'bond' has multiple meanings in the world of finance so it's important that these meanings are not confused. This article looks at the bonds that are also known as time deposits, as offered by banks and building societies in the UK.


What is a bond?
A bond, or time deposit, is akin to a savings account in which money is locked away for a fixed number of years (typically 1-5 years) and subject to a fixed rate of interest. When this fixed period ends, the bond is said to have 'matured'. 


Pros and Cons
Bonds are characteristically subject to restrictions such as:

• Penalties (usually of 6+ months of interest) for early withdrawals.
• Permitting only a single deposit, or accepting further deposits only until a particular date. 

The interest rates offered by bonds will typically be the best available. Finding the right bond is, therefore, a balancing act between the interest rate you want to gain and the restrictions you're prepared to adhere to. As a general rule, the more onerous the restrictions are, the better rate of interest you're likely to receive.


Considerations
The main question is how much money you can afford to relinquish for years at a time. Even if you are living comfortably and within your means, it's impossible to know what might be around the corner and so it is unwise to commit all of your savings into a bond.

Equally, it is all but impossible to know what will happen to interest rates over the coming years. Though it seems unlikely at the time of writing, an improvement in the economy could drive interest up and leave you with your money bound to a comparatively pitiful rate. 

It should also be borne in mind that the £85,000 government guarantee also applies to bonds. If you are considering investing more than that, be aware that you will be taking a gamble if the bank or building society were to fail.


Conclusion
Before committing your money into a time deposit, make sure that you can afford to do so while making reasonable provisions for dealing with any unforeseen problems that may arise within the term. If you're concerned that you would not be able to leave the money alone for such a term, consider putting your money in an easy access savings account instead. 

What is a cash ISA?

An ISA or 'Individual Savings Account' is a special kind of bank account with unique tax rules.


Tax status
Savings held in a cash ISA account are subject to neither income tax nor capital gains tax. 
Despite being tax free during the lifetime of the holder, a cash ISA is still subject to Inheritance Tax in the normal way if the holder dies. 


Eligibility
You must be at least 16 years of age to open a cash ISA, and 18 years of age to hold a stocks and shares ISA (the latter is beyond the ambit of this article).


It is typically free to open a cash ISA, but individual providers may vary so be sure to ask appropriate questions. 


Making deposits
There is a limit to how much you are allowed to deposit in your cash ISA each tax year. The tax year runs from the 6th of April to the 5th of April. The deposit threshold changes from year to year but is currently at £5,640 for a cash ISA for 2012/2013. 

There is no restriction on when or how much you may withdraw, but the maximum deposit allowance is not replenished by withdrawals: if you were to deposit £5.640 one day, and withdraw £5,000 the next, you would not be permitted to make a further deposit during that tax year in spite of the fact that the ISA would be holding only £640.

You may only make deposits while you are residing in the UK. If you were to move abroad, you could still hold your ISA and existing savings would still gain interest, but you would not be permitted to make further deposits. 


Transfers
The maximum deposit allowance is personal to you, not to the account. ISAs can also usually be transferred from bank to bank without affecting your deposit allowance; however, as you are allowed to hold only one cash ISA at any given time, a transfer would mean transferring ALL of the funds and closing the existing cash ISA. Some providers may charge a fee for carrying out this transfer, so be mindful and ask questions if you're unsure. 


Other considerations
When considering whether to make a deposit into an cash ISA, be mindful of interest rates. Some ISAs pay such pitiful rates that it can sometimes be more lucrative to hold the money in a taxable account.


Conclusion
It is typically a good idea to make the most of your deposit allowance on a cash ISA, but be aware of interest rates and think about whether your money could work better for you elsewhere. 

Savings interest 101

This article takes a basic and introductory look at savings interest. We’ll be looking at interest on loans and credit cards a little later.

What is Interest?
Interest is a sum of money that is earned on amounts held in banks and other financial institutions. It is expressed as a percentage of the overall savings figure. For example: if your account’s ‘interest rate’ is 3%, then you would receive 3 pounds for every 100 pounds you have in that account. That may not sound like a lot, but the more you save the more you earn. Getting the best rate of savings interest is about making your money to work for you.

There are two general types of interest: simple interest and compound interest.

• Simple interest is applied only to the original figure. 
• Compound interest is applied both to the original figure AND the interest that has accrued - in other words, interest on top of interest.
  

Interest is paid because banks and other financial institutions invest and lend the money that you hold with them. The ‘interest’ they pay to you for letting them do this is only a fraction of the profit they make. It is, however, virtually free of risk (for amounts below 85,000 at least).

Interest is subject to income tax unless you are tax exempt. Even if you are tax exempt, forms will need to be obtained from your bank for your account to reflect this.


Getting the Best Deal
Most current accounts pay very little interest. Online savings accounts and ISAs generally pay a little more. However, the highest rates of interest are only available from bonds.

The general rule is that the higher the rate of interest, the more numerous or onerous the catches. For example: high interest current accounts require a deposit of at least 1000 pounds per month, online savers provide limited access to your cash when you’re out and about, and most bonds require you to lock your money away for years and charge hefty fines if you withdraw before the end of the agreed period (before it ‘matures’). Finding the right interest rate is, therefore, something of a balancing act: you want the highest rate of interest possible with the fewest restrictions. 

The most common restrictions are on withdrawals, which can sometimes include interest penalties for early withdrawals. However, some accounts also restrict the number of deposits you can make as well, meaning that to get the best rates of interest you may be led to lock away more of your money than you can reasonably afford to.

Millions of people all over the country are ignorant of the often pitiful interest rates that they are receiving from their current accounts and savings accounts. Many still believe that loyalty pays, but this is no longer the case. If your bank isn’t doing you any favours, it’s time to ditch it in favour of a new account. It is now easier than ever to find the right account for you given the number of comparison websites that are popping up all over the place.


Perks
A lot of accounts feature a bonus interest period for new customers (often for the first 3, 6 or 12 months). If you elect to open such an account, it’s worth making a note on your calendar of the date when the bonus will end.

Some banks and financial institutions reward new customers with one-off cash incentives (some of which can be over 100 pounds) for opening an account and transferring direct debits to it. If such an offer catches your eye, it is very important to make sure that you will be able to satisfy the offer's criteria, and that the interest rate isn't so low/charges aren't so high as to make the cash incentive irrelevant.

Be aware that some accounts are set to pay interest into a separate elected account. This means that interest on these accounts cannot be compounded (see above).

Conclusion

Never sign up for anything without knowing what you're getting yourself into, and you should always be alert around deals that seem too good to be true. It can take time to shop around. For many this can seem like a daunting process, but it is well worth the effort.

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Opening a lot of different bank accounts can be injurious to your credit rating. Once you have left one account, be sure to close it. A long-standing bank account can also support your credit rating, so it is worth keeping at least one old account open, even if it’s left holding only a small amount.