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What are high and low priority debts and which one to pay off first?

One of the first steps you should take when coming up with a plan for repaying your debt is to establish an order for paying back what you owe. To repay your debts most effectively you have to identify which are the most important and concentrate on paying these off first.

Identifying which are your priority debts and which are your non-priority debts is a key part of becoming debt free. But what are priority debts? What are non-priority debts? And how do you work out which is which? Our guide explains everything you need to know about prioritising your debts.

What are ‘priority’ debts?

Priority debts are those debts that you should pay first. They aren’t necessarily the largest debts or the debts with the highest interest rate. However, if you do not pay a priority debt there will generally be some serious consequences.

Usually the most important debts are those secured by property that you want to keep, such as your house or car. However, failure to pay other priority debts might leave you bankrupt, without heating or electricity or in court. That is why it is vital that you pay your priority debts before all others.

Priority debts include:

  1. Your mortgage, secured loans or rent. Payments for a place to live are obviously essential. Many people get into serious debt problems and find themselves with nowhere to live because they fail to keep up their monthly or weekly rent, mortgage or secured loan payments. Unless you know you are going to move and have a new place to live, paying your rent or mortgage is likely to be your top priority. This includes payments to any secured debt consolidation loans because non-payment of these could also result in the loss of your property.

  2. Income tax, National Insurance and VAT. It is important that you pay any tax that you owe. Not paying tax could lead to you being made bankrupt. In addition, while a tax debt alone is not a sufficient reason for a prison term, cases of serious fraud could result in criminal proceedings.

  3. Child maintenance.Not paying child maintenance via the Child Support Agency (CSA) or under a court order could lead to a court appearance unless you can convince the authorities that you really could not pay. If your income has dropped sharply, you may be eligible for a reduction of your child maintenance obligation.

  4. Council Tax and utility bills. Being without gas, electricity, heating, water or a telephone is dangerous and can leave you with no lighting or heating. Payments to your utility providers should be near the top of your priority list. Again, speak to the utility companies about alternative payment plans. In addition, speak to your local council if you will have trouble paying your Council Tax. They may be able to reduce what you have to pay. For example, you might qualify for Council Tax Benefit ora discount you didn't know about.

  5. Car finance payments. If you need your car to keep your job, try and keep up the payments. If you do not need it, consider selling it to avoid repossession which will almost always occur if you fall behind on the repayments.

  6. Other secured loans. Secured debts are linked to specific items of property. For example, money owed on your house and car are secured debts. Debts on furniture, boats, caravans and expensive electronic equipment may also be secured. If you do not repay the debt, the creditor can take the property. So, if the property is something you cannot live without and you think the creditor will take it, you will need to keep up to date with the payments. Alternatively, you can try and work out a payment with the creditor involved.

What are ‘non-priority’ debts?

A non-priority debt is one with no immediate or significant adverse consequences if you fail to pay. Paying these debts is a desirable goal, but not one of your main priorities.

You may not lose your home or go to prison for not paying 'non-priority' debts. However, you can still be taken to county court and ordered to pay what you owe. And, if you still don’t pay, there are a range of county court enforcement options your creditors can try to take against you.

Non- priority debts include:

  1. Credit and charge cards. If you do not pay your credit card bill, the worst that will happen before the creditor takes you to court is that you will lose your credit privileges. If you need a credit card, keep and make the minimum repayments on one card and put that card on your priority debts list.

  2. Loans from friends or relatives. You may feel that you have a moral obligation to pay loans to people you know well. However, these creditors – who psychologically seem the least like creditors of anyone – should generally be the most understanding with you and the most likely to negotiate your repayment terms.

  3. Store cards. As with credit and charge cards, if you fail to pay these bills you will probably lose your credit privileges and, if the debt is large enough, you may be taken to court.

  4. Unsecured or payday loans. Unsecured and payday loans are not tied to any item of property. So, the creditor cannot take your property if you refuse to pay without taking out a ‘charging order’. If you refuse to pay, the creditor can collect from you only by obtaining a court judgement. These unsecured debts are rarely, if ever, a priority to pay first. Bear in mind, however, that a court judgement turns an otherwise non-priority, unsecured debt into a priority one. Creditors can collect on a court judgement by taking your property.

  5. Overdrafts.Overdrafts are unsecured borrowing and therefore will rarely be a priority debt. Speak to your bank who may agree an arrangement for you.

Working out whether something is a priority or non-priority debt

Some debts may be right on the line between priority and non-priority. Not paying the debt won’t cause severe consequences in your personal life, but it could prove painful nonetheless. In deciding whether or not to pay these debts, you should consider the relationship you have with the creditor and whether the creditor has already begun efforts to collect the debt you have with them.

Some debts which can appear in the grey area between priority and non-priority are:

  1. Car insurance. It is against the law to drive without insurance. So, you might consider this a priority debt if your car is essential to you.

  2. Things your children may need. Paying for a maths or English tutor for your child may not seem like a priority. However, if the alternative is that your child fails their exams or fails to get a university place, you might well want to keep paying for the tuition.

  3. Payments for a car that is not essential for your job. The extreme inconvenience of not having a car (for example if you live in a rural area) may justify making these payments.

  4. Court judgements. Once a creditor has a court judgement they can collect it by taking some of your property. If a particular creditor is about to employ a bailiff to collect property to pay a debt the fact that the original debt may have been a non-priority one is irrelevant. Making payments to this creditor is exchange for keeping your belongings may be essential otherwise the bailiffs might take steps to take them.

The order in which you should pay your debts

From what we have seen, there is a simple order in which you should pay your debts:

  • Priority debts
  • Non-priority debt with the highest interest rates
  • Other non-priority debts

If you can afford to pay more than the minimum payments on your non-priority debts, you should target the debt with the highest interest rate. You can compare the interest rates on your non-priority debts by looking at the APR (Annual Percentage Rate) on your monthly statement or loan agreement. Paying high interest debts first will help you to repay your debts much faster and you will also pay far less in interest.

Once you’ve cleared your most expensive debt, move on to overpaying on your next most expensive one.

Getting help if you are struggling with debt

If you are struggling to manage your debts and you are not sure which debts to pay first, it may benefit you to seek professional advice.

Services such as the Citizens Advice Bureau and the Consumer Credit Counselling Service can provide you with advice and help you to prioritise your debts.

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