Our Guide To What Happens If You Can’t Pay Your Debt

Love Debt Free guide to what happens if you cant afford to pay your debts
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If you’ve ever borrowed money without combing through the small print, you’re not alone- according to a Money Advice Service poll, a remarkable 84% Brits don’t read the T&Cs before signing a contract. 

If you’re one of the many who are guilty of taking on credit without checking the contract properly, you could be left wondering what lies in store if you can’t afford to repay your debt. 

In truth, the only person who has full knowledge of that is you: you are the only one who has all of the contracts you signed, for all of the debts you owe. 

Whenever you sign a loan contract, you agree to follow repayment rules written by that specific lender; if you don’t follow them (by not paying your debts, for example), the lender can take action based on what is written in the contract you signed. For that reason, the consequences of not paying off a debt will be slightly different from lender to lender. 

However, there are certain things that apply across the board because they are decided by law, not individual lenders. 

In this guide, we’ll look at the things that are likely to happen (regardless of your lender’s unique T&Cs) if you can’t afford to pay your debt; and what you can do to get help if you’re stuck in this situation.

What Kind Of Debt Do You Have?

The consequences of not paying back a debt depend on what kind of debt it is. All borrowing- from store cards to car finance- falls into one of a few categories: 

Priority Debts

These are debts which need to be prioritised because of the severe and immediate consequences of not paying them back. This could be because the lender has special legal powers to deduct money from your salary, cut off essential services or take away your home or essential belongings if you don’t pay them back. Common priority debts include Council Tax and Mortgages. 

Non-Priority Debts

Any debt which isn’t a priority debt falls into this category. Although you still need to pay these back, the consequences of not doing so are not as extreme as with priority debts, and lenders may be more flexible if you can’t afford to repay them. Even so, a non-priority debt can become a priority debt if you ignore it.

You could still face legal action to make the debt a priority and your credit score will be harmed- which could make it hard to borrow money again in the future. Examples of non-priority debts are payday loans or personal loans.  

Unsecured Debts

Unsecured debt is a loan which a lender gives you without asking for any collateral. It’s given based only on the lender’s belief that you will pay it back.

The lender uses the information in your credit report to decide how risky it would be to lend you money; if they are happy with the level of risk, you’ll get the loan. If you don’t pay it back, the lender can take legal action against you. 

Secured Debts

When you take out a secured loan, you offer assets as collateral to the lender. These are valuable belongings, such as a car, house or boat, which the lender can take away from you and sell to recover their losses if you don’t pay back your debt. Most secured debts are considered priority debts, because most people only have one home or car, and their life would be severely impacted if they lost the collateral property.

As you can see, there is some overlap between the categories: most secured debts are also priority debts, and most unsecured debts are non-priority debts.

If you aren’t sure which category your debts fall into, check the table to see common kinds of debt and how they’re classified for the rest of this guide. 

Secured DebtsUnsecured Debts
Priority DebtsMortgagesCouncil Tax
Logbook LoanMagistrate Court Fines
Homeowner LoansIncome Tax, VAT, NI deductions
RentEnergy Bills
Hire PurchaseChild Maintenance
Landine ConnectionsCounty Court Judgement
Energy Bills
Non-priority DebtsLoans secured on non-essential belongingsBank Loans
Payday loans
Store Cards
Overdrafts
Credit Cards
Catalogues
Water Bills

Priority Debts 

When it comes to paying back your creditors, not all debts are equal- priority debts should be the first payments you make when you have money because they carry particularly heavy consequences if you fall behind. 

As with all debts, the lender may choose to charge penalty fees for late payment and add interest to your outstanding debt, so it continues to grow. Late payments will also reflect on your credit file, which could make it hard to borrow money in the future. 

With a priority debt, the lender also has special powers: they could forcibly deduct money from your income, send bailiffs to your home or attempt to repossess your property if you don’t pay them back. 

These things won’t happen all at once; the lender is likely to escalate their actions, the longer the debt remains unpaid. 

Secured Debts

If you stop making repayments on a secured loan, your lender could issue a default notice to break off the contract and take the property you offered as security. 

In the case of logbook loans and hire purchases, the lender can simply tow away the vehicle and take it to auction without having to go to court first. 

If you’re in arrears over a mortgage, things work slightly differently. The lender will need to file a ‘possession action’ at court, where a judge will decide whether or not you get to keep your home.

If you can’t come to an agreement with the lender over how to repay your debts during the court case, the judge could issue a ‘possession order’ so the lender can take your home and sell it to pay off your debt.

Creditors With Special Legal Powers

In the case of government taxes and arrears, the department you owe money to may have special legal powers which enable them to enforce payment in various different ways.

For example, if you don’t pay your Council Tax, the council can file an ‘attachment to earnings’ order to take the money directly from your salary or benefits, whether or not you can afford to make the repayments. 

Similarly, failure to pay Child Maintenance could result in a visit from the bailiffs, a second mortgage being placed on your home (called a ‘charging order’)

In extreme cases, you could be forced to declare bankruptcy for not paying government debts. If you refuse to pay these debts when you have the money to do so, departments have the option to file criminal charges which carry a prison sentence. 

Consequences Of Not Paying Government Priority Debts

Type of DebtConsequences of non-payment
Council TaxA visit from bailiffs, money is taken from wage, money taken from benefits, debt secured against the home, bankruptcy, imprisonment
Child MaintenanceMoney taken from wage, money taken from benefits, visit from benefits, imprisonment
Magistrates Court FinesA visit from bailiffs, money taken from wage, money take from benefits, imprisonment
Tax, VAT or National InsuranceA visit from bailiffs, money is taken from wage, bankruptcy, county court judgement
County Court JudgementA visit from bailiffs, a charging order, money is taken from wage
TV LicenseA fine

Did You Know….under-25s Have The Most Problems With Priority Debt Areas?

Out of the under 25s who called debt charity StepChange:
25% had council tax arrears averaging £534
14% are behind on gas payments by an average of £338
15% are behind on the electricity by an average of £339
Source: StepChange

Non-priority Debts

Unlike priority debts, there is a less immediate risk of serious consequences if you don’t pay back a non-priority debt. However, things can get serious if the debt is ignored for a long time, and if you’re a homeowner, it could eventually turn into a priority debt. 

Normally, unsecured debts move along a similar route if they remain unpaid: 

Penalty Fees 

As with all arrears, the lender may you penalty fees for late-payments and may continue charging interest on your debt even if you stop paying, meaning your debt will continue to grow.

Any missed payments will also reflect on your credit file, which could make it difficult and more expensive to get a loan in future. 

Default Notice

If you stop making repayments or don’t pay enough back each month, the lender could decide to cancel your agreement by issuing a ‘default notice’.

You’ll have two weeks from the time the notice is issued to settle your debt or negotiate with the lender to stop this happening. If a default notice is issued, it will stay on your credit file for six years for other lenders to see. 

Debt Collectors

When the lender terminates your loan agreement, they are unlikely just to write off your debt. Instead, they may sell it to a debt collector.

Debt collectors are different from bailiffs and have no more power than the lender, but they might be more persistent in calling you and may even send someone to your home- although they can’t do anything apart from reminding you about the debt when they do.

However, they are allowed to keep adding interest and charges to your account and could decide to file a County Court Judgement to try and force you to pay the loan. 

County Court Judgement

Lenders and debt collectors are allowed to file County Court Judgement (CCJ) to try and get a legal charge against your debt. If a creditor plans to do this, they must notify you in writing. You’ll have a chance to appeal if you think there has been a mistake, and a chance to tell the court how much you can afford to pay. 

Once a CCJ is issued, the payment plan you agreed to becomes a priority debt. This means that if you don’t pay on time, the creditor can send bailiffs to your home (who can take your possessions to pay for your debt), force the debt to be secured against your home with a ‘charging order’ or even file for you to be declared bankrupt.  

If your outstanding debt is very large (more than £5000), your creditor- or creditors- may file for a statutory demand directly, which is the first stage in forcing you to declare bankruptcy.

Can You Be Made Homeless Over Unpaid Debts? 

It really depends. If your debts are secured against your home, there is a risk that you could be made homeless if you do not pay your debts. Whether you have rent arrears or mortgage arrears, your creditor will need to go to court to get permission to evict you. If the court your decides to grant the landlord or lender permission, you’ll have 14 days notice before you need to leave. 

Some unsecured debts can also put your home at risk if you don’t keep your arrears in check. Certain debts with the government, such as Council Tax, can be secured against your home if you get into debt. 

If you are worried about being made homeless because of your debt, you should seek help with a debt counsellor and consider speaking to homelessness organisations to find out what help is available. 

Can You Go To Jail Over Unpaid Debts? 

Not unless you’ve committed fraud. This includes lying to creditors about how much you can afford to pay or deliberately avoiding them when you clearly have enough money to pay them back. 

It is extremely rare for someone to be imprisoned over unpaid debts. If a bailiff or debt collector threatens you with prison over unpaid debts, you can report them to trading standards. It’s a lie and constitutes harassment.  

How Can Love Debt Free Help?

Here at Love Debt Free, we have partnered with some of the UK’s leading Debt help companies.

They have already helped thousands of people reduce and manage their debts, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these debt help companies, click on the below and answer the questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting Love Debt Free.
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