Prioritising debt: Which bills are essential?

By Marianne Curphey

If you are unable to pay all of your bills, it may be time for financial triage. Prioritise your debts, pay the essentials and work out a payment plan with the remaining creditors.

"If your income is extremely limited or you have fallen on hard times, then an in-depth review of your debts is essential," says Philip Pearson, of the independent financial adviser P&P Invest. "Some debt can be deferred, or a payment holiday can be arranged with the lender."prioritise-debt

Before you start sorting your bills, it helps to understand the difference between secured and unsecured loans. "A secured loan is where someone can take something from you -- an example is a mortgage, hire purchase agreement on a car or a loan secured on your property," says Bev Budsworth, managing director of The Debt Advisor.

That's not to say that there are no consequences for ignoring an unsecured loan, such as a credit card bill. Let that slide and the bank will issue a default notice, which stays on your credit record for six years. Things get worse from there.

"If you fail to pay after the default notice is issued then they have to issue a writ, which may become a judgement and ultimately a charging order, elevating that debt from unsecured to secured," Budsworth says.

That process, however, takes six to eight weeks, during which time you have an opportunity to settle the debt. The idea is not to avoid paying unsecured loans or non-essential debt, but to build your savings by postponing or making smaller payments on those debts. Hopefully you will be on your feet when it's time to focus on them.

With that in mind, which bills should you make pay first?

1. Mortgage or rent and utilities
"We all have a limited income. It is therefore essential at the start of the month that you prioritise how best to make your money go as far as possible," says P&P's Pearson. "This starts with identifying the essential bills that need to be paid each month in order to continue living in your home."

At the top of the list should be the mortgage or rent payment as, if you get into arrears, you could face losing your home.

Next should be utility payments. "You can have your gas or electricity cut off if you don't pay, or the utility company may install a meter, which makes it much more expensive," says Budsworth.

Water should be the last of those bills. You won't be cut off for failing to pay your water bill because it is deemed an essential service.

2. Council tax
This is another one that comes at the top of the list. Your council can order your employer to deduct a regular amount from your wages or benefits to go toward your unpaid council tax. "If you don't pay your council tax a bailiff can come and take your goods away," says Budsworth.

If paying the tax means you can't pay other bills, you may be able to get some relief. Ask the council if it's willing to accept smaller payments.

3. Court fines
A county court judgment is nothing to ignore -- you could be taken back to court and forced to pay the original amount plus fines for late payments.

If you have multiple judgments against you, you can arrange to pay all your debts to the court in a single weekly or monthly payment. This will stop people taking action against you to get their money -- for example, by sending bailiffs to your home. However, you can only do this if your total debts are under £5,000.

4. Child support
If you don't pay the child maintenance you owe in full and on time, the Child Maintenance Service may take the money directly from your earnings or from your bank account. The service does not need to apply to a court to be able to do this.

5. Credit Cards
If you are struggling to pay your credit card bill, consider transferring the debt to a card with 0% interest.

"Very often, savings can be made in the amount of interest you pay on debt through consolidation to a new arrangement on a lower rate of interest," says Pearson. "In order to benefit from this, you need to keep up the payments on existing debt, otherwise your credit rating will be seriously affected."

To make this kind of arrangement work, you will need to stop charging on the cards and be disciplined paying off the debt before the promotional period ends. "Set up a direct debit or standing order to ensure that amount is paid off each month," advises Budsworth. "Don't just pay the minimum or you will end up in more debt."

See related: To improve finances, create a better mindset, How to handle credit card debt while unemployed

Published: 4 March 2014