I have multiple debts; which one should I pay first?

August 2, 2016

It can be overwhelming when you owe money to more than one creditor, and can’t decide what to do next. Although at first you might have thought it best to pay off your debts in full, one by one, there comes a time when you need to take a different approach and look at your financial position as a whole.

This holistic approach is the most effective way to regain financial control, and by taking a wider view you set yourself up for a more stable future.

So where do you start when there are numerous creditors all demanding payment? Initially, it’s important to differentiate between secured and unsecured debt.

Secured and priority debt

This is borrowing secured on an asset, usually a property, but it might also be a vehicle. Your mortgage loan is secured on your home, and so should take priority over credit or store card borrowing, for example.

Secured loans are the ‘top level’ category of debt, but you also need to consider any arrears of council tax and energy payments. These are termed ‘priority debts’ because failing to pay them could affect your ability to live comfortably in your home.

Unsecured debts

Many UK consumers have some form of unsecured borrowing – a credit card, store card, personal loan, or bank overdraft. It is a normal part of everyday life, but using too much credit can lead to unmanageable levels of debt.

It’s easy to think you should pay off one creditor at a time, but this is not the best approach, and can lead to a debt trap that is impossible to escape from. So if you’re stuck in this situation, what is the best way forward?

Look at your overall financial position

Once you’ve identified your secured debt, you need to list all unsecured creditors and the amounts that you owe. In general, creditors prefer to receive some form of payment each month, even if it is only a small amount, so there really is no point in paying off a credit card in full only to face legal action for another debt.

Only by taking this all-inclusive approach can you deal effectively with multiple debts. Trying to appease one creditor when all are clamouring for payment, simply does not work.

Negotiate for a reduced payment on each debt

Depending on your situation, you might decide that informal negotiations are preferable to a formal insolvency procedure in stabilising your financial situation. If this is the case, you’ll need to contact each creditor to explain your current position, and suggest a new monthly arrangement.

You may find that they’re open to receiving smaller amounts for a period of time, or would be willing to freeze the additional interest and/or charges to allow you some time to recover financially.

Professional negotiations by a licensed insolvency practitioner

If after obtaining professional debt advice, it seems that entering a formal insolvency process would be a better option, a licensed insolvency practitioner would deal with creditors on your behalf.

They undertake negotiations for a single, affordable monthly payment that is distributed between creditors, so that each one receives an acceptable amount in repayment of their debt.

You are protected from further creditor action as long as your obligations under the new installment plan are met, and this can help you finally regain financial control.

Scotland Debt Solutions has been helping Scottish residents to escape debt since 1989. We provide professional advice and will identify whether formal insolvency would be the most beneficial solution. Call one of our experts for a free initial meeting in confidence.

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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