Step 2 - Decide priorities

Some debts carry more severe penalties than others and this means that they must be dealt with first. Priority treatment is not determined by the size of the debt, the period or amount of arrears or the threats being made, but by the actual legal remedy the creditor has against you for recovery. A PRIORITY debt is usually defined as one where non-payment can result in you:

being imprisoned
losing your home
losing essential goods or services.

Below is a list of priority debts and the legal consequences of nonpayment:

Type of debt	Final sanctions for non-payment
Mortgage/secured loan	Loss of house
Rent	Eviction
Gas/electricity	Disconnection/fitting of prepayment meter
Water	Since the Water Act 1999, the supply cannot be disconnected, but we recommend that this is regarded as essential expenditure, and treated as a priority payment.
Council tax	Taken from wages/benefits; bailiffs; imprisonment
CSA/maintenance orders	Taken from wages/benefits; imprisonment
Magistrates fines	Bailiffs; imprisonment
Inland Revenue and VAT	Bailiffs; bankruptcy, imprisonment

PRIORITY creditors must be dealt with before any offers or payments are made on SECONDARY debts. SECONDARY debts are all those which do not carry the above sanctions. For example:

Type of debt	Final sanctions for non-payment
Credit/store cards	County Court Judgement
Personal loan (unsecured)	County Court Judgement
Bank loan/overdraft	County Court Judgement
Hire purchase*	Loss of goods
Credit sale	County Court Judgement
Catalogue**	County Court Judgement
Pawnbroker	Keep pledge
Loan shark***	Not legally enforceable unless licensed
Loan from family/friends***	Country Court Judgement

* If the threatened goods are an essential requirement, for example a washing machine or car needed for work, such a debt must be treated as priority, but if you have paid less than one third of the total owed under the hire purchase agreement the creditor can repossess the goods without a court order.

**Catalogue debts may be difficult to enforce as it is not always standard practice to complete a formal credit agreement, and creditors should be asked to produce a copy of this if proceedings are threatened.

***Individual circumstances may suggest some other debts be treated as priority, although not legally enforceable, e.g. money owed to family, friends or loan sharks.

Before you make offers of payment to any creditors you will need to prepare a financial statement - see STEP 3.

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