Priority Debts and IVAs
A priority debt is defined as one for which there are more serious or immediate consequences for the non-payment of compared to certain unsecured debts. Priority debts are excluded from an IVA and budgeted to be paid in full.
In the context of an IVA, debts are referred to as either an expenditure item or included as a creditor.
An expenditure item
When entering into an IVA, a calculation is made to determine your available disposable income. This establishes how to much you to have to pay towards your non-priority debts once you've paid for your living expenses, important obligations and priority debts. Your available disposable income is how much you pay into the IVA.
So, priority debts and other important obligations are said to be excluded from an IVA but are an expenditure item used to determine the IVA payments.
Included as a creditor
A creditor in an IVA represents a negotiable debt. It is these debts which are said to be included as a creditor in the IVA and cleared once the IVA completes.
Priority debts are those you should be paying ahead of debts from unsecured borrowing.
Priority Debt Examples
Mortgage and Secured Loans
Failure to make payments to secured loans or mortgage could lead to repossession your home. If you are a homeowner this is one payment you really do not want to miss. If you are struggling with payments speak to your lender. If it is a short term issue, for example between jobs or sickness or Covid-19 related, then a payment holiday may be possible.
Logbook loans and some car finance arrangements are also secured loans.
Mortgage a secured loan repayments (and any catch-up payments) are expenditure items.
Rent Arrears
If you don’t pay your rent, you could be evicted. If you’ve moved home still owned money then it is an unsecured debt.
Rent and rent arrears owed to your current landlord are an expenditure item.
Arrears payment to a previous landlord/address is included as a creditor.
County Court Judgments
Insolvency law states that when someone applies for an IVA, all their unsecured creditors must be treated equally, with no advantage being afforded to one over another. This is even the case when a CCJ, has been awarded.
CCJS are included as a creditor.
Debts resulting from High Court Action
The High Court is most likely to be used for larger claims to recover debts that are not regulated by the Consumer Credit Act 1974. For example, business and trade creditors, often where there is a dispute.
High Court instructs using a special type of bailiff called High Court Enforcement Officers (HCEOs). HCEOs have more power than regular
CCJS are included as a creditor.
Council Tax
Council Tax arrears are a priority debt as the council can send bailiffs to your home or take payment directly from your wages/benefits. In extreme cases, they can apply for committal to prison. Council tax is an essential expenditure.
While arrears can be included in an IVA, this is only when you are the only person in your household who pays council tax. Other names appearing on the bill remain liable for the entire bill or any arrears.
Council tax payments are an expenditure item.
Council arrears from previous years are included as a creditor.
Gas or Electricity Arrears
A supplier is not going cut off your supply if you fail to pay these bills. You will be eventually fitted with a pre-payment meter, but this excludes you from the cheapest tariffs.
If you have arrears; try to make an arrangement with the supplier to repay them in instalments. Otherwise, you may find yourself issued with a CCJ (county court judgment) with a repayment schedule determined for you.
Arrears payments to a current supplier and your ongoing bills are an expenditure item.
Arrears payment to a previous supplier, at a current or former address, are included as a creditor.
Water Arrears
This differs from other utilities as you can not change water supplier. Domestic users cannot be disconnected, but court orders can be obtained to enforce payment.
Water arrears from a previous address and your current address can both be included as a creditor.
TV Licence
You need to be covered by a valid TV License if you watch or record TV as it’s being broadcast, even if you only use a streaming player. It costs £145.50 for a TV Licence. While not a debt, this is a priority as not having one can result in prosecution.
A TV licence is an expenditure item.
Hire Purchase / Conditional Sale
If you do not keep to the repayment terms then these items could be repossessed, as you don’t own them until all payments have been made. Therefore HP or other contracted payments on essential items are considered to be a priority debt.
Essential items include goods required for basic domestic living, for example, a reasonable car, washing machine or items needed for work.
Goods subject to an HP agreement are an expenditure item.
If the goods are returned to the finance company and a shortfall remains outstanding this becomes an unsecured debt and can be included as a creditor.
Income Tax / VAT / National Insurance Arrears
Evading payment means that bailiffs could be sent to your home or you could face imprisonment. If Her Majesty’s Revenue and Custom (HMRC) thinks there is little prospect in payment being forthcoming, then bankruptcy proceedings may follow.
Payments due are an expenditure item
Arrears have the potential to be included as a creditor.
Magistrates Court Fines
Failure to pay the court fines could lead to bailiffs being sent to your home or imprisonment. The debt can also be deducted from your wages or benefits.
Fines payment are an expenditure item.
Maintenance Arrears
This is a serious priority debt because if you fail to maintain the payment levels determined by the Child Maintenance Service, they can instruct your employer to make deductions directly from your wages or apply to the magistrate’s court for a liability order. Payments due and arrears are an expenditure item in an IVA.
Note: an exception to all of the above is if bailiffs have already entered your home and you have signed a walking possession agreement. It is then too late to include and the debt as a creditor in an IVA, the debt must be settled under the court’s terms or you will lose some of your possession.