Types of Debt

Debt is never a topic people would like to discuss, however in today's economy, dealing with debt is a lot more common than you realise and not as scary as you might expect. 

At NDH Financial, we advise our customers on how to resolve a wide range of debts, from business debts to payday loans (which, unfortunately, are still a type of debt). 

Before we decipher the different types of debts and what they involve, let us break down what we mean by the term debt.

What is debt?

Debt refers to the money owed by one party to another. In most cases, it is used by individuals and large corporations alike to make purchases they would not be able to afford without additional support, although debt can take other forms. For example, debt can occur from an overpayment of benefits, or from tax due on income that has been earned.

A debt agreement is the understanding between the two parties concerned that the money will be repaid by an agreed date in the future. Depending on the type of debt, this may or may not include interest. Interest is the money added on to the amount outstanding. Usually the higher the risk, the larger the interest. 

In some cases, the statutory interest rate will be charged, for example when a matter has been referred to court, and an order has been made. When getting into a debt agreement, it is worth making sure you fully understand the terms agreed, including the amount of interest you are expected to pay, if any. 

The types of debts vary. At NDH Financial, we have experience in assisting our customers with a range of debts including benefit overpayments, loans, and credit card debts. 

So, what exactly are the different types of debts?

Secured debt

This type of debt can have the most severe consequences for the recipient of the debt, as the debt is agreed upon based on the provider receiving some form of collateral. The collateral can refer to anything given to the lender as a form of guaranteed payment. In some cases, this can be your house or car. The agreement stands that if the loan is not repaid within the agreed time limit then ownership of the collateral item will transfer to the debt provider.

For example, when you obtain a mortgage to purchase a house, the mortgage is a type of debt that is secured against the house. If you then fall behind with your mortgage payments by three or more missed payments, the mortgage provider can look to repossess the property.

When considering options for dealing with your debts, most will not include your secured debts, as you would usually prefer to keep the asset. If there are any arrears, then an allowance should be made to allow you to clear the arrears. If you have handed back the asset, or it has been repossessed, then any outstanding shortfall can be included in the IVA.

Unsecured debt

Unsecured debt refers to debt that is owed, but is not secured against an asset. In most cases, the debt arises from an agreement that is made in good faith that the borrower will keep to their word and repay the loan. The agreement will include a contractual obligation for you to repay the debt. There are other circumstances that can lead to debt being incurred. For example, if you are self-employed, you will probably incur a tax liability with HM Revenue & Customs each year, which you are required to pay by a specific time.

Alternatively, if you fail to pay your Council Tax on the due dates, the liability for the year will become due, and you will be required to pay the outstanding liability in full. If you do not take steps to pay the debts within the required time, the creditors may then apply to court for a judgement confirming you have failed to pay the debt at the required time. This judgement then allows the creditor to take further action, such as instructing bailiffs, obtaining attachment of earnings order, or a charging order, which would then be secured against your property.

At NDH Financial, we work to help our customers resolve a range of unsecured debt. Here are some of the common types of debts we can assist you with:

Credit card debt - Credit card debt refers to the total balance outstanding on your credit card, which may be higher or lower than your credit limit. Your credit limit will be set by the credit card provider based on your circumstances. With a credit card, you will be required to pay a minimum payment towards it each month, and if you fail to pay the minimum payment, the payment will be treated as missed. The minimum payment will usually require you to pay the interest accrued, and a small contribution towards the outstanding balance. If you exceed your credit limit, this may constitute a default, and you may be prevented from using the facility in the future. Having long term credit card debt on your record can impact your financial future, and some people end up in a cycle of making the minimum contributions, and never clearing the outstanding balance, even after 6 years. At NDH Financial, we can work with you to assess your circumstances and find a debt relief solution that is feasible for you. 

Payday loans - With the increase in financial strain over the past few years, it is very easy to fall into a cycle of relying on short term loans, otherwise known as payday loans. A payday loan is essentially a short term borrowing option where you borrow a small amount, with a view to repaying it in full the next time you receive an income. On the surface, they can appear like a quick win, however, they tend to charge a high-interest rate for short term credit. It is very easy to land in difficulty as a result of these schemes, as you may find you end up taking out another loan the following month, due to paying back the previous month. In fact, according to Raisin UK, there has been a 350% increase in searches for payday loans and there are reports that 1 in 12 people are taking part in a payday loan scheme, so you are not alone. At NDH Financial, we are able to sit down with you and discuss your personal situation to see how we might be able to help you get back on track. 

Store cards - This refers to debts you rack up on store cards, such as a Debenhams card or B&Q account card. You usually sign up with the promise of a discount or vouchers, however there is one caveat to these types of cards. The interest rate usually hovers around 20-30% APR which is higher than a regular credit card, as the lending criteria may be less strict. This can make it easier to build up debt and make purchases you are unable to pay back at the end of the month. This can have a huge impact on your credit rating or your long term financial future. With the help of NDH Financial, we are able to sit down with you and explore the appropriate solution to manage your debts. 

Overdrafts - An overdraft is something you set up with your bank as a security blanket. It enables you to spend more money than you have available. The amount of your overdraft varies but is usually an agreed limit discussed by you and your bank. Do not be fooled - overdrafts are actually hard to deal with. After you reach your limit, it can be hard to pay it back, and people often find themselves in the cycle of clearing the overdraft when they are paid, to then use it all by the time of the next pay day. The majority of banks also include interest which will be added to the amount you owe. With an IVA debt relief scheme, you have the chance of becoming debt-free. 

Gambling debts - Gambling debt refers to debt created as a result of gambling activity. In most cases, it is unlikely the debt is owed to the casino or bookmaker, and is instead owed to a credit card, or a bank due to a loan taken out. These debts tend to build up over a period of time, and are used to supplement the person’s income, as they have insufficient funds for household needs, as they are using their normal income to gamble. This type of debt can impact your mental health as it can be difficult to see a way out and due to stigma. If you have incurred debts due to gambling, all is not lost; our expert team is on hand to identify appropriate solutions, such as creating an Individual Voluntary Arrangement, to help you get back on track. 

Bank loans - Another type of debt we specialise in assisting our customers with are bank loans. These are loans provided by the bank based on an agreed repayment schedule. The loans are usually taken out for big purchases such as weddings, start-up capital and vehicles, or to consolidate a number of other debts into one payment. These longer term loans usually have a lower interest rate, however, this will depend on the lender. You can find out more about how we can assist you with your bank loan debt by contacting us on 0800 002 9051 or applying via our website. 

Catalogue debt - It is very easy to make purchases using a catalogue and have the payment spread out over a certain time period. It is an accessible way to purchase expensive goods, however, over time it becomes a more expensive solution as it comes with a high-interest rate. If you repeatedly miss payments, your case is usually sent to a debt collection agency and then court action may be taken. If you find yourself unable to manage your catalogue debt, speak to a member of our team who will be able to discuss debt relief options with you. 

Buy Now Pay Later - Similar to catalogues, this newer form of debt can be used for purchases, and the payment is then spread out over a period of time. In some cases, no interest is charged for using this finance, although in some cases interest may be charged at a later time. Although it can be a convenient way to make one off purchases, it does need to be paid back at some stage, and it can easy to become overcommited. If you find yourself with unmanageable debt, speak to a member of our team who will be able to discuss appropriate debt relief options with you. 

Bailiff debts - Although no debt begins as a bailiff debt, if you do not pay a creditor the agreed amount over a period of time, they may apply to court for judgement, and then instruct a bailiff to recover the debt. A County Court Judgements (CCJs) is what the creditor will need to obtain to instruct a bailiff, although there are other criteria for instructing bailiffs for, council tax arrears, parking fines, etc. Situations like this can be complex. Each case is unique, so it is useful to speak to a financial expert who will be able to discuss your options with you. Apply here to find out how NDH Financial can help you with your bailiff debts today. 

Business Debts - These are debts taken out for a business. It may be that it was taken out to help start a self employed business, or the bank has requested a personal guarantee for a limited company. There is a wider range of finance available for businesses outside of the normal credit cards and fixed term loans, such as working capital loans, fixed asset loans, factoring loans and hiring process loans. Finance can be useful in resolving short term issues, managing the cash flow or funding longer term projects, however, when things do not work out as planned, you may find it difficult to repay the debt. If you are self employed, our dedicated team can discuss the option of an Individual Voluntary Arrangement to help get you back into a stable financial position, and provide you with legal protection from your creditors. Where the debt relates to a personal guarantee you gave in respect of a limited company, the IVA can help you resolve the outstanding debt without resorting to bankruptcy.

Short term loans - Short term loans are usually geared towards small businesses who are unable to secure a bank loan or individuals who find themselves in a cash flow conundrum. They often have a bad credit rating or poor credit history which means the interest rates on these loans are high. The amount you can borrow usually needs to be paid back in a short period of time. Most repayments need to be made within 6 - 18 months. If you have fallen into arrears as a result of a loan, our dedicated team can discuss the option of an Individual Voluntary Arrangement to get you back into a stable financial position.

Priority debts 

These are the types of debts where the consequence of not paying the debt or resolving the issue could lead to you losing assets such as your house, or a court summons. They usually take precedence over other forms of debt as they affect your standard of living. This includes rent arrears, mortgage arrears, council tax arrears, court fines, tax credit payments, unpaid income tax, catalogue debt, and gas and electricity bills, to name a few. Some of these debts can be included in an Individual Voluntary Arrangement, however, others, such as Court Fines or mortgage arrears, cannot be included.

At NDH Financial, we can provide you with assistance on the following forms of priority debts:

Council tax debt - If you are late in paying your council tax or have missed payments and as a result, your account is in arrears, you could end up in serious legal trouble as your local council has the ability to take you to court to recover the money you owe them. In extreme cases, bailiffs can be instructed to seize your property. Before it gets to this stage, we advise you to contact a member of our team who will be able to discuss your options with you with the hope of providing you with an IVA debt relief solution that helps you. 

Old utilities debt - Utilities usually include household debt such as gas and electricity bills. If you have missed payments or are in arrears, these debts should take precedence for repayment as the gas and electric companies have the ability to cut off your supply, impacting your standard of living. If you are struggling to make your utility payments, our financial experts will be able to discuss a potential IVA debt relief plan to ensure you have a consistent supply of gas and electricity while you catch up on your payments.

Benefit Overpayments -If you have previously been entitled to a benefit, and your circumstances change, the awarding authority may not have updated your entitlement with your new circumstances. If this happens, any overpayment will need to be repaid.

Unpaid Income Tax - Although most people will pay the appropriate tax through their employer, if you are self employed, a Director, or if you earn over a certain amount and you are in receipt of Child Benefit, then it is likely you will need to submit a self assessment, and pay the required amount to HM Revenue & Customs. If you fail to pay the amount on time, and do not agree a time to pay arrangement, HM Revenue & Customs will take steps to recover the debt, which may result in a bankruptcy petition being presented against you. Our expert team is on hand to identify appropriate solutions, such as creating an Individual Voluntary Arrangement, to help you avoid bankruptcy.

Apply now for a solution to your debt issues

At NDH Financial, we understand the toll getting into debt can take on you. We are here to tell you that you are not alone. As a fully licensed insolvency practitioner, we specialise in helping individuals find debt solutions. While we do not make any promises, we do help thousands of people become debt-free. 

Find out how we can help you and apply now.

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