Our Guide for People Struggling With Different Types of Debt

Love Debt Free guide for people struggling with different types of debt
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In recent times we have seen more and more people struggling with different types of debt often unaware of the help and assistance available.

There are so many different ways in which you can fall into debt, and once you start to get behind with payments, it can be difficult, if not impossible, to catch up.

Regional Variations

Before we take a look at the different types of debt which are commonplace across the UK, you may find the following table of interest.

It shows the top 10 cities in the UK ranked by average consumer debt per person (not including mortgage debt) at the start of 2020. In many ways, the figures reflect regional salary/cost of living differences.

CityAverage Debt per person
Source: Credit Connect

We’ll now take a look at the various types of debt which are commonplace across the UK.

Thankfully, there are numerous ways in which you can address debt issues so that they don’t hang over you like a grey cloud for the rest of your life.

Council Tax Debt

Love Debt Free Council Tax Debt

Unfortunately, as the cost of living continues to rise across the country, many people are struggling to cover their council tax payments. One of the main problems with council tax arrears is the fact that they are classed as a “priority” debt.

This effectively means that councils have very strong powers when pursuing arrears. We have seen occasions where councils will employ debt collectors, and recent regulations have given councils the power to take funds directly from bank accounts.

While councils are obliged to inform individuals of their outstanding council tax and remain open to repayment plans, ultimately they can go into your bank account unannounced to take funds.

So, if you are ever in a situation where you are starting to fall behind on your council tax, or you can see potential issues ahead, it is best to negotiate with the authorities before falling too far behind.

The vast majority of councils will be receptive to those struggling, but if you bury your head in the sand, then you may face serious repercussions further down the line.

Credit Card Debt

Love Debt Free Credit card debt

In previous years credit card companies could approach those moving into adulthood with the offer of a credit card. While the regulations are much stricter today, there is no doubt that credit cards are still extremely popular and they can be very useful.

Whether you are attracted by the buy now pay later philosophy, the various loyalty points available or the special offers which many credit cards offer to their customers, it is not difficult to see why they are popular.

In reality, as long as you pay back your balance each month, you won’t be charged any interest, and you won’t get into serious debt.

Unfortunately, there can be a temptation to use your credit card when you are “short of funds” with the idea of paying it back in the not-too-distant future. For many people, this can be the start of a slippery slope to excessive credit card debt.

As the interest payments continue to mount, we have seen numerous people unable to cover even their minimum payments going forward. This can often be the tipping point and the moment when their credit card debt is out of control and needs to be addressed.

Store Card Debt

Love Debt Free Store card debt

Many people have a whole variety of different store cards in their purse/wallet, which they use on a regular basis. In a similar fashion to credit cards, you are allowed to purchase goods on a buy now pay later basis and then make a payment towards the end of the month.

If you pay the outstanding balance in full, then there will be no interest charges; however, once interest charges begin to mount up, things can get difficult.

The initial attraction to store cards tends to be the huge discounts on day one, ongoing offers, promotions and ease of payment. Store cardholders will often be bombarded with an array of offers with focused marketing now able to alert you to specific offers as you approach, for example, your birthday.

Then we have the seasonal offers such as summertime and winter where Christmas comes into play – and the high street gets very competitive! It is not difficult to see why some people can very quickly find store card debt mounting and experience great difficulty in even paying off the minimum monthly amount.

Unlike council tax arrears, store card debts can be included in the vast majority of debt management arrangements if need be.

However, the best course of action is to be prudent with expenditure and try not to be tempted by the constant array of offers.

Overdraft Debt

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While many people see overdrafts as a convenient way of lending money until next payday, in reality, this is one of the more expensive types of debt. You will tend to see overdraft interest charges displayed as daily amounts or monthly figures (which often look very low).

However, unfortunately, they tend to mask the annual charge, which can often be well in excess of 20%. Many banks will also introduce an array of additional charges if you go over your overdraft which can very quickly accumulate. So, why do so many people fall into the overdraft trap?

Competition amongst UK banks is extremely competitive, and the vast majority of banks will at some stage offer new clients a “buffer zone” which is effectively a small interest-free overdraft. However, as customers very slowly begin to include that buffer zone in their financial calculations, they can then move on to a formal overdraft with potentially high-interest charges.

It is then easy to dip into your formal overdraft for a birthday present, perhaps a weekend away or you are a little short for Christmas. Many people will stay with the same bank for years simply because they can’t afford to move away.

When you have an overdraft in excess of £2000, it is going to take some time to repay that back!

Benefit/Tax Credit Overpayments

Love Debt Free Benefits & Tax credit overpayments

In recent years the UK benefits system has come in for severe criticism, often described as complicated, dysfunctional and a case of the left hand having no clue what the right hand is doing.

There have been some horror stories over the years where individuals having allegedly informed the benefits office of changes to their circumstances, in order that their benefit payments can be adjusted, but to no avail.

On occasion, maybe due to misunderstandings or simple administrative errors, years down the line you could receive a potentially huge demand for benefit overpayments.

Did you know that the Department for Work and Pensions (DWP) can go back as far as 12 years to reclaim benefit overpayments? As you can imagine, some people have been hit with demands in the tens of thousands of pounds with no way to repay them.

If contributions cannot be taken from regular benefit payments or wages, then court action will likely ensue. However, there are a number of debt management options which will allow this type of debt to be included.

Alternatively, anyone struggling with benefit overpayment issues can negotiate their debt management plan direct with the DWP.

Friends and Family Debt

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Unfortunately, many friendships and families have been blown apart by debt issues when loans have gone wrong. There is a saying, never mix business and pleasure, and this is very true when it comes to money, friends and family.

As a consequence of the initial close relationship between various parties, many will dismiss the idea of a formal loan agreement as they “trust each other”. When the borrower gets into financial trouble and begins to miss repayments, this can leave the lender in a very difficult legal position.

We have seen numerous court cases where debts have been effectively written off as a consequence of no formal legally binding agreement. Obviously, for the vast majority of individuals in this position, they may lose a lifelong friendship or cause huge internal family disputes.

It has to be said there are many loan arrangements between family/friends, which are successful, concluded with no issues whatsoever and every party is happy.

However, if you go down this particular route, it is advisable to start on a sound business footing where all parties know their liabilities and potential consequences – write them down!

Maintenance Arrears Debt

In recent times the UK government has undertaken a huge review of the child maintenance system and the impact on UK benefits. As a consequence, those who have fallen off the radar or actively chosen not to fulfil their maintenance obligations have received letters demanding payment of maintenance arrears.

We have seen some exceptional circumstances where this type of debt can be written off, but ultimately that will be decided by the DWP. So what can you do if you have maintenance arrears and the DWP is threatening action?

The first thing to mention about maintenance arrears is the fact that they are classed as a “priority” debt. This means that those who have maintenance arrears will need to either pay off these arrears in one lump sum or come to some arrangement with the DWP.

Interestingly, in a similar fashion to council tax arrears, the DWP has the power to access individual bank accounts to reclaim funds owed.

So, if you find yourself in a situation where you have significant maintenance arrears, and you’re not in a position to pay them in full it is essential that you try to arrange a repayment plan.

Mortgage Shortfalls Debt

Love Debt Free Mortgage shortfall debt

Mortgage shortfalls/arrears are also classified as a priority debt, which means that mortgage lenders have powers to reclaim outstanding funds. As mortgages are generally secured against the property, the likely course of action would be the sale of a property, often a fire sale at below the market price, to raise sufficient funds.

Any surplus funds would be returned to the homeowner while any additional shortfall would be pursued either via a repayment plan or possibly legal action.

When you consider that your home is at risk if you fall behind on your mortgage, it is important to take action as soon as problems start to emerge. You may be able to arrange a mortgage holiday with your mortgage provider, perhaps switch mortgages to a more appropriate interest rate/term or maybe even downsize.

The sale of a property to cover outstanding mortgage payments is the last resort, but it is nevertheless a real risk for those experiencing financial difficulties.

Approaching your mortgage lender as soon as these difficulties emerge will, at the very least, buy you a degree of goodwill.

Payday Loans

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Payday loans have been a political hot potato over the last decade with serious adverse publicity prompting a major change in interest charges and the way in which overdue payments are pursued. Indeed, in recent years we have seen some major names in the payday loans industry fall by the wayside as a consequence of serious allegations and legal action.

While perhaps not as much in the headlines as it has been, there is still a buoyant and active payday loans market and in all honesty, these businesses do serve a particular short-term need.

While lending criteria are much stricter these days, a change in financial circumstances could see anyone fall into serious financial trouble. Therefore, in a worst-case scenario, it may be a relief to know that this type of debt can be included in the majority of debt management arrangements.

The solutions may see the individual paying back part/all of the outstanding debt, or in more challenging circumstances, the debt could be written off.

There is far more protection for consumers these days, especially those who find themselves in serious financial difficulties.

Rent Arrears Debt

Love Debt Free Rent arrears debt

In a similar fashion to mortgage arrears, rent arrears are also classed as a priority debt and are not always applicable with regard to debt management arrangements. If you are struggling to cover your short-term rental payments, it is very important that you contact your landlord as soon as possible.

This may be a council landlord or a private landlord, but whatever the case, early communication is the key to a successful outcome. The situation is a little difficult compared to other debts because, in theory, you could be evicted from your home if unable to cover future rent.

While in practice, this would take numerous court visits and legal action by the landlord, it is nevertheless an option.

Those who are struggling to cover their rent and unable to see any material change in their finances in the short to medium-term may be able to get assistance from the authorities.

Alternative, as we touched on above, sympathetic landlords may well look to assist where possible.

It is a very complicated situation, whether involving public or private landlords, and a difficult debt to get written off.

Tax Debts

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Income tax or VAT arrears are classed as priority debts and are unlikely to be included in any form of debt management arrangement. As with other priority debts, HMRC can obtain the power to take funds from individual bank accounts to cover monies owed.

Obviously, this is the most serious course of action and one which would only be undertaken if a negotiated settlement could not be agreed.

Therefore, as soon as you become aware of potential financial difficulties which may challenge your ability to pay income tax/VAT liabilities going forward, then you need to contact HMRC.

Many people are able to arrange formal debt repayment plans with HMRC because their ultimate goal is to obtain as much of the outstanding funds as possible.

In the event that they were to take legal action against an individual/company with few assets and little income, this could end up being a waste of time.

Therefore, like many creditors, they would prefer to enter into negotiations and try to agree on a suitable arrangement.

Utility Debts

Love Debt free Utility Debts

Akin to mortgage/rent arrears and council tax/rate arrears; utility debts such as gas and electric are treated as priority debts. As a consequence, the utility providers have more control when trying to reclaim outstanding monies.

While some debt management arrangements will allow the inclusion of utility debts, it is imperative that future payments are honoured; otherwise, there could be serious repercussions.

It is also worth noting that not all debt management arrangements will allow you to include utility bills.

In the event that you are unable to keep up with gas and electric payments, this could potentially lead to disconnection. On a more positive note, in recent years, we have seen the introduction of regulations which protect individuals (to a certain extent) from being disconnected from vital services such as gas and electric.

This could lead to financial assistance from the authorities, a long-term debt repayment plan or even the introduction of card meters on a pay-as-you-go basis.

There are also various charitable organisations which offer financial assistance for those struggling.

Business Debts

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The UK has a very strong entrepreneurial spirit and a growing number of self-employed individuals looking to build their businesses. In the early days, it can be difficult to obtain finance, and many lenders may request personal guarantees from business owners.

So, whether you have set up a formal company, some kind of partnership arrangement or you are a sole trader, there could be serious repercussions if your business is unable to honour ongoing loan repayments.

If negotiations to extend terms/come to some kind of alternative arrangement are unsuccessful, then lenders will eventually fall back on the guarantor – you!

Therefore, individuals could be held liable for significant business debts which originally looked sensible with limited downside when signing up as a guarantor.

Lenders could, in theory, pursue the guarantor and force them to liquidate various assets to cover monies owed. While this type of debt can be included in a vast array of debt management plans, this would be a last resort.

Personal Loan Debt

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Whether you have taken out a personal loan for business reasons or personal reasons, you are liable for regular repayments going forward. Obviously, when taking out your loan, the lender will carry out an affordability calculation based on your financial scenario at the time.

It is very important that you are upfront and honest about the reasons for taking out a personal loan, assets owned and regular income.

The lender will also ask whether you expect a significant change in your financial circumstances in the short to medium-term and, if so, how this would impact your ability to repay the loan.

At this moment in time with UK base rates hovering just above 0% the headline rate for personal loans has fallen significantly of late. As a consequence, many people may look to refinance loans taken out on higher interest rates to take advantage of the current situation.

However, in the event that you are unable to finance your personal loan and struggling to keep up with repayments, this type of debt would qualify for the majority of debt management options.

Sometimes it may be possible to arrange a revised repayment plan with your lender, but if you are also struggling with other debts, then it may be time to take professional advice.

Secured Loan Debt

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As the term suggests, secured loans are taken out using different types of collateral. This may be a property, valuable asset, insurance policy or some other financial tool. In effect, this creates an insurance policy for the lender in the event that the borrower is unable to keep up with repayments.

There is a general misconception that lenders will, at the first sign of trouble, quickly look to liquidate assets used as collateral – in reality, this is the last resort. They would much prefer to come to an alternative arrangement with their customers to continue repayments, possibly at lower levels, potentially a repayment holiday or spread over a longer period.

However, rest assured if negotiations are unsuccessful, then they will call in the security.

The fact that this type of loan is secured against an asset means that the majority of debt management arrangements will not accommodate this type of liability.

If it is secured, there is no reason why a lender would choose to sign up to an arrangement where at best they would receive reduced payments and at worst see their debt written off.

When looking at secured loans, it is very important to go into any arrangement with your eyes wide open and appreciative of any potential consequences.

Unsecured Loans

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Unsecured loans are one of the most popular types of debt in the UK and most commonly associated with personal loans. They are in effect a loan agreed by reviewing the individual’s credit rating without seeking collateral or a guarantor.

How and when the loan will be used would be taken into account as well as the individual’s ability to cover repayments. This type of loan arrangement can be used for an array of different activities such as a car loan, holiday, home improvements, etc.

As there is no security involved with this type of debt, in the event of financial difficulties in the future, they can be incorporated into debt management arrangements.

Whether looking at an IVA, debt management plan, bankruptcy, etc., unsecured loans can be included leading to either reduced repayments, extended terms or a debt write-off.

Car Debt

Love Debt Free Car debt

There are numerous types of car debt which are regularly included in various debt management arrangements. This may be a direct loan from the dealership, a personal loan or one of the many different variations of hire purchase-including PCP.

The one potential problem with some of these arrangements is the fact that with the exception of a personal loan, it is unlikely you would have legal ownership of the vehicle until all funds have been repaid.

As a consequence, the lender would be well within their rights to sell the vehicle to recover debts owed.

The situation is a little different with a personal loan used to acquire a vehicle in that you will have legal ownership from day one.

As this type of debt can be included in any informal/formal debt repayment agreement, there is the potential to negotiate alternative repayment terms or a potential debt write-off.

Joint Debts

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Last but not least, there tends to be a degree of misinformation and potentially dangerous misunderstandings with regards to joint debts.

In the event that you were to take out a joint loan with another party, and one of you was struggling with their “share” of the repayments, the legal outcome may surprise many people.

In the eyes of the law, each individual party in a joint loan arrangement is liable for the full loan as opposed to just their share. Therefore, if one party was to apply for some form of debt management option such as bankruptcy or an IVA, it is unlikely that a joint debt would be included.

Assuming that the other party is liquid and able to cover repayments in full, they would be expected to do so.

In the event that they were to experience their own financial difficulties, then there may be the option to include the joint debt in a formal debt management arrangement.

Our Summary

There are many different types of debt commonplace across the UK today which have varying consequences in the event of future financial distress.

We have looked at priority debts, joint debts, those involving assets and agreements which include a guarantor.

There are also unsecured debts, overdrafts and other facilities which can often attract relatively high-interest rates. If you are struggling to make repayments on your debts, it is important to contact the lender to try and arrange an alternative repayment plan as soon as possible.

In the event that no agreement can be reached, you may be forced to look at the various debt management options best suited to your scenario.

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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