SPOILER ALERT Have a go at the quiz here before reading this page!
A reminder: all the examples are for someone living in England, Wales or Northern Ireland. The same general diagram may apply in other countries, but the types of debts, the timescales and credit recording may be very different.
A brief (no jargon!) explanation of my terms:
- Priority = a debt that is important, because something bad can happen if it’s ignored.
- Legal = any debt where there is a balance unpaid.
- Enforceable = any debt where you may be taken to court and are likely to lose.
- On credit record = any debt of yours that is showing on any of the three credit reference agency records.
If you are feeling confused, talk to a good debt adviser. Priority debts, whether they are in section 1 or 2, all need to be sorted – getting a proper repayment plan in place – before you deal with non-priority debts. See What debts and bills are top priority? for more info.
Why is each debt placed in that section?
1) Priority debts which are not on your credit record
A lot of priority debts don’t appear on your credit record, including magistrates court fines and rent arrears.
A) Council tax arrears from last year
L) Unpaid income tax
S) Child maintenance that you owe
2) Priority debts which are on your credit record
The priority debt which do appear on your credit record are mortgages, secured loans, Hire Purchase type arrangements and (often) utility bills from your current property.
G) Your PCP car finance
J) Your mortgage
M) Current electricity bill which you can’t pay.
3) Non-priority debts which are enforceable and on your credit record
This area is where “consumer debts” – loans (whether from a bank or a specialist or high-cost provider such as payday loans), credit cards (including store cards and catalogues), overdrafts etc start.
B) Three year bank loan taken out a year ago.
N) Your overdraft
Q) Mortgage shortfall from when your house was repossessed in 2013
This used to be a priority debt in section 2. But when you lost the house, it became an unsecured loan. These debts don’t become statute barred for 12 years – if you have a large mortgage shortfall it’s best to seriously consider bankruptcy to get a clean start rather than ignore it.
U) “Buy now, pay later” deal on a microwave from Littlewoods.
Make sure you know if a large ticket item you have bought on finance from the retailer is a normal loan or on Hire Purchase. “Rent to own” or “pay weekly” shops such as Brighthouse are HP contracts. These are priority debts as you will lose the object if you can’t pay and they belong in section 2.
W) Credit card account opened ten years ago and managed with no problems for seven years. Now in an arrangement to pay (or DMP) for three years.
Arrangement to pay debts can stay in this section indefinitely until they are repaid. A defaulted loan will move to section 4 six years after the default date – so Check if your default date is correct.
4) Non-priority debts which are enforceable but not on your credit record
All sorts of non consumer debts are here. They never appear on your credit file (unless the creditor goes to court for a CCJ, when the CCJ will show up even though the debt itself isn’t there). Examples include gym memberships, nursery school fees and debts to suppliers if you are self-employed.
The other types of debt here are consumer debts that started in section 3 then you defaulted more than six years ago so they have dropped off your credit record. If you hadn’t made any payments for more than six years, the debt would probably be statute barred, see section 6.
C) Credit card you defaulted on seven years ago and you have been making token payments ever since.
P) Money you owe a builder.
5) Legal but non-enforceable debts which are on your credit record
Something specific has happened to a debt in this area so it is no longer likely to be enforceable in a court. If you ever get a Claim Form for one of these debts you still need to defend it – but you have very good grounds for thinking you will win.
F) Credit card debt included in a Debt Relief Order that started six months ago.
All debts which are included in a form of insolvency are here: DROs and bankruptcy for a year; IVAs until it completes after 5/6+ years. During the insolvency, a creditor cannot enforce the debt. When the insolvency is completed, the debt moves to section 7 as nothing will be owed.
H) A bank loan from 2009 which you stopped paying in 2011, where the debt collector can’t find the Consumer Credit Act agreement.
For Consumer Credit Act debts (loans and credit cards only – not overdrafts) if the creditor can’t produce the correct documentation, they can’t enforce the debt in court. See National Debtline’s Ask for your CCA information factsheet which has a template letter. The creditor is more likely to find this difficult for accounts that were opened before 2007 as the rules about what has to be produced changed after then.
You can reasonably stop paying these debts, though they still legally exist and there is a very slim chance that the creditor will find the agreement.
O) A 4 year old bank loan you settled with a full & final settlement last year.
You might expect this debt to be in section 7, but even though your credit record should show a balance owing of zero, the debt still legally exists. The only time this matters is if you try to reclaim PPI on it, because a refund may be offset against the debt.
6) Legal but not enforceable debts which are not on your credit record
The debts in this section are mostly “statute barred” – see Common questions about statute barred debt for details. If you are taken to court for one of these debts, you can defend on the grounds it is statute barred. If you see a statute barred debt on your credit record, the default date is wrong!
D) British Gas debt from a house that you left eight years ago.
This bill will have started off in section 2 when you still lived in the house. When you left it ceased to be a priority, so section 3 would be the correct place. But now the bill date was more than six years ago, it should be statute barred, so it’s here. No need to pay it though!
I) A credit card you haven’t paid anything to since 2008 and where a Default Notice was issued more than 6 years ago.
If you had made any payments in the last six years, this would be section 4 and still enforceable. The debt still exists – if you try to reclaim PPI, it may be offset against the debt.
7) On your credit record but not a legal debt
These debts are all showing as settled or satisfied on your credit record with zero owing. They drop off your credit record 6 years after the default date or the settlement date, whichever is earlier.
K) A catalogue debt you defaulted on in 2015 and paid in full last year.
R) Bank loan you repaid on time five years ago.
T) HP on a car which you voluntarily terminated last year.
V) Payday loan debt from 4 years ago – you went bankrupt two years ago and were discharged one year later.
This will drop off six years after the default date. All debts that have been in a type of insolvency (bankruptcy, IVA, DRO) should have had a default date on or before the start of the insolvency.
8) Nowhere !
E) Letter from a debt collector about a Talk Talk account which isn’t yours.
This isn’t your debt so it doesn’t belong in any of the sections. Send the debt collector a Prove It! letter and ask for it to be deleted from your credit record if it is incorrectly showing.