Selling assets to clear debt

 October 2017

Fact sheet no. 55 EW Selling assets to clear debt

Use this fact sheet to:

  • find out which assets you are allowed to sell;
  • understand some of the main reasons for selling assets to help clear debt;
  • learn the advantages and disadvantages of selling your assets to clear debt; and
  • understand the main things you need to remember when using money gained from selling assets.

What is an asset?

An asset is something that you own that is valuable and which you could sell to raise money. For example, your home, car, jewellery, shares and so on are usually treated as assets.

You do not have to sell your assets to clear debt. However, you could consider it as an option. This fact sheet gives advice on important things to take into account. We also describe the advantages and disadvantages of selling your assets to clear debts.

See our fact sheet:

Ways to clear your debts.

It is very important to consider all your options carefully before deciding to sell your assets. Contact us for advice.

 

Reasons for selling assets

Selling your assets to help pay debts that you owe can help you in different ways.

  • It can ease pressure on you if your creditors are chasing you for payment.
  • It may help to stop creditors taking legal action against you.
  • If you can’t pay off all your debts, you could reduce them so that you can manage them more easily, or ask your lenders to write off the rest.
  • It can help you to get out of debt if you have a low income or no money available.

Methods of selling

There are many different ways of selling assets. For example, you could sell them privately on the internet. There are different websites that allow you to auction your goods. Alternatively, you could advertise in your local newspaper or use a local auction house.

Make sure you understand how each method of selling your assets works and how much it will cost you before you agree to anything. Also, make sure that you sell your assets for their true value. You may want to get some free valuations of your items before deciding what to do.

Some methods of selling an asset may take longer than others. For example, it may take you longer to sell your home through an estate agent than sell an asset such as an antique at an auction. When discussing your plans with your creditors, make sure you agree a long enough period to sell your assets..

Do I have the right to sell an asset?

In some circumstances, you may not be able to sell assets.

  • If you have a car, or other item, on a hire-purchase or conditional sale agreement, you do not own the item until you make the final payment and complete the agreement. If you want to sell the item before finishing the agreement, you need your lender’s permission.
  • If you have a car or other item on a lease or rental agreement, you do not legally own the item. The agreement usually just gives you the right to use it as long as you make the agreed payments. Therefore, selling a leased or rented item would be a criminal offence.
  • If you have an item such as a car on a bill of sale agreement, the lender owns the goods until you pay off the loan. It is a criminal offence to sell an item that has a bill of sale agreement attached to it, without the lender’s permission.
  • If one or more of your creditors has taken action against you by using enforcement agents, you may not be able to sell your goods. The law about enforcement agents is complicated. Contact us for advice.
 

How should I use the money I've raised by selling assets?

You may have a lot of different creditors asking you for money. Some may put more pressure on you than others. However, this doesn’t always mean that you should pay those creditors first. Before you decide what to do with your money, it is important to understand the powers that different creditors have.

Priority creditors are the most powerful. If you do not pay what you owe, you may lose an essential service or an essential item. For example, if you do not pay your rent or mortgage, you could lose your home. If you do not pay your gas or electricity, your supply could be cut off. If you do not pay your council tax, as a last resort the council could apply to send you to prison.

Non-priority creditors cannot immediately take away an essential service or an essential item if you do not pay them. These creditors are more limited in what they can do to collect what you owe. For example, credit cards, unsecured loans, store cards and unsecured overdrafts would normally be non-priority debts.

When you decide how to use money from selling assets, you could first put some money aside to pay for your essential living costs.

  • You could then choose to clear priority debts first.
  • If you have a lump sum of money and want to use it to reduce your non-priority debts, we usually suggest dividing your money between your creditors on a pro-rata basis. This means that they all get a fair share. Contact us for advice.
  • You could make full and final settlement offers to your non-priority creditors. This means offering each creditor a fair share of your available money and asking them to write off the rest. There are important things to consider when making full and final settlement offers. Contact us for advice.
  • You could consider an individual voluntary arrangement (IVA). This is a legally binding agreement with your creditors to pay part of your debts back. Although IVAs are often based on making regular payments over an agreed period, you could also set up an IVA based on selling your assets to raise a lump sum. Creditors vote on whether to agree to the arrangement. In order for the arrangement to be set up, there are rules about how many creditors have to agree. There also fees to pay. Contact us for advice.
  • There may be some limited circumstances where you choose to clear certain non-priority debts before others. For example, some non-priority creditors may threaten to take legal action against you to recover what they say you owe. Just because creditors threaten this, doesn’t mean it will happen. Some creditors threaten to take further action but don’t carry it out. However, some aggressive creditors could take court action against you quickly. If legal action will have serious consequences for you, you could reduce or clear these debts first. For example, your contract of employment may say that you could lose your job if you get a county court judgment against you. Contact us for advice.
  • Some creditors may be charging interest at a much higher rate than others. This means that those debts are increasing much more quickly. In this situation, you could use your money to reduce or clear these debts first. This may help to make your remaining debts more manageable. Contact us for advice.

Warning:

treating creditors differently

If you clear some debts before others or if you don't treat them all fairly (for example, by making pro rata payments to them), this could cause problems if you later choose some types of insolvency options. See the later sections Individual voluntary arrangements, Debt relief orders and Bankruptcy. Your other creditors may also refuse to accept your offers and freeze interest and charges if they think they are being treated unfairly.



 

 

 

 

 

 

 

Effect on benefits

If you use money from selling assets to clear debts, it can affect your benefits.

  • If you already claim benefits, you must tell the DWP or council about the money you receive. This can affect how much you are entitled to. Be careful, because you may still be treated as having the money, even after using it to clear debts. Contact us for advice.
  • If you claim benefits after using your money to clear debts, you may still be treated as having the money for the purpose of working out how much you are entitled to. This is a complicated area. Contact us for advice.

Effect on tax

In some situations, selling assets can affect your tax position. This depends on the asset you sell and how much you sell it for. You may need to get professional advice to help you understand how selling your assets can affect your tax position. We can suggest ways for you to find the right type of tax advice. Contact us for advice.

Selling your home

Your home is likely to be your most important asset. Selling your home could be a suitable option if there is enough value in it to pay off what you owe and leave you with enough to buy somewhere cheaper. This is often referred to as ‘downsizing’. However, there are important things to think about before deciding what to do.

Carefully consider the costs involved and how this will affect you.

  • You may have to pay for your property to be valued, although many estate agents offer free valuations. Check before making your appointment.
  • Estate agents will charge you fees for selling your home. You usually pay these when the sale process has finished.
  • Your solicitor will charge you fees for the work they do in selling your property.
  • If you still have a mortgage, your lender may charge you fees – for example if you are in a fixed interest-rate period.

Extra advice:

jointly owned property

If you jointly own your home with someone else, you have to get the joint owner's permission to sell the property.

Check that there is enough value in your home to pay off your mortgage and any secured loans and also these extra costs.

Check to make sure that you can afford the bills in your new home. Complete a personal budget to check that you can afford all your regular outgoings. If you can’t, you risk getting into debt again. Contact us for advice.

Extra advice:

think carefully

If you sell your home, your financial future may be less secure. You will no longer have that asset for the future. So consider all your options carefully before deciding what to do.

 

 

 

 

 

Individual voluntary arrangements

An individual voluntary arrangement (IVA) is a legally binding arrangement to pay back part or all of your debts over an agreed period, usually five years. It is set up by an insolvency practitioner. Creditors vote on whether to agree to your IVA.  If you have paid off some creditors but not others, creditors are likely to take this into account when they decide whether to agree to your IVA. Contact us for advice.

Debt relief orders

A debt relief order (DRO) stops most creditors from taking further action against you and can help you to get a fresh start. You have to meet strict criteria to qualify. A DRO is not usually suitable if you have assets worth more than £1,000. Some limited assets are not taken into account.

An official receiver will decide your DRO application. They will consider whether you have made any transactions at undervalue or shown preferences to any of your creditors. Specific timescales apply.

  • A transaction at undervalue means that you have given away an asset for less than its full value.
  • A preference means that you have treated a creditor more favourably than others. For example, you did not work out pro-rata payments for non-priority debts because you wanted to pay off one debt before others.

If the official receiver thinks that there has been a transaction at undervalue or a preference, they could refuse your DRO application.

See our fact sheet:

Debt relief orders (DROs).

If a DRO is made, but the official receiver believes that you have been dishonest or irresponsible either before or after a DRO is made, they can place further restrictions on you. These restrictions can last beyond the year of your DRO, for up to 15 years in serious cases. Contact us for advice.

Bankruptcy

See our fact sheet:

Bankruptcy.

Bankruptcy is a way of dealing with debts that you cannot pay. Whilst you are bankrupt any assets that you have might be used to pay off your debts. After a period of time (usually one year) you are released from liability for most of your outstanding debts and you can make a fresh start. This is known as discharge from bankruptcy. There are advantages and disadvantages to consider carefully before you decide to go bankrupt. Contact us for advice.

If you have made any transactions at undervalue or given any preferences to your creditors, further restrictions could be placed on you which last beyond your discharge. In some situations, the undervalue transaction or preference may be reversed, so that you and the creditor are put back to the same position you were before the transaction took place. For example if you paid a large lump sum to a family member to clear a debt you owed them, but paid nothing to other creditors. In this situation, the trustee may seek to recover the money you paid to the family member.

Can a creditor force me to sell my assets?

The Financial Conduct Authority sets rules about how most creditors should behave when collecting debts. One of these rules says that creditors should not pressurise you to sell your assets to raise money to repay the debts. If your creditors are putting pressure on you to sell your assets, contact us for advice. You may be able to make a complaint. We can advise you how to do this.

In some situations, creditors have a legal right to sell your property themselves.

  • If you have an item on hire-purchase or conditional sale and you fall behind on payments, the creditor has the right to repossess the items. There are set procedures that they have to follow, which depend upon how much of the original agreement you have paid.

See our fact sheet:

Bill of sale.

  • If you have a car and you take out a bill of sale agreement on it, the creditor becomes the owner of the vehicle whilst you repay the loan. If you fall behind on payments, the creditor can repossess the vehicle. They have to follow certain procedures. If the vehicle is sold for more than you owe to the bill of sale lender, you will get what’s left over after everything has been paid. Contact us for advice.
  • If you have a mortgage or secured loan on your home and you fall behind on payments, the lender could take court action to repossess your home. It could be sold to repay what you owe. You would get any money left over after everything has been paid. Contact us for advice.
  • If a creditor has taken court action against you they may have got a charging order to secure the debt against your property. If so, they could ask the court to allow them to sell your home. This is rare, and it is up to the court to decide whether to grant this request. There are things you can do to try and prevent this. Contact us for advice.

Advantages of selling assets to clear debt

  • It can help to relieve pressure from some creditors who may be chasing you for payment or threatening legal action.
  • It can help to stop priority creditors taking action to remove an essential service or an essential item.
  • You may be able to pay off those creditors who charge interest at a higher rate so that your other debts are easier to manage.
  • Clearing your debts helps you to get a fresh start and reduce stress.

Disadvantages of selling assets to clear debt

  • If you don’t treat creditors fairly, it can cause problems if you choose certain insolvency options in the future.
  • You are likely to have less money for your future and retirement.
  • If financial emergencies occur in the future, you may not have enough money or assets to deal with them.
  • You may only be able to leave a reduced inheritance when you die.
  • In some situations, you could still be treated as having money you have used to clear debts when the DWP or your council look at your benefits.

This is not a complete list of all the advantages and disadvantages of selling assets to clear debts. There may be other things you need to consider in your particular circumstances. Contact us for advice.

Credit reference issues

The way you have managed your credit accounts and debts will be recorded on your credit reference file. If you have fallen behind with payments, this may affect your ability to get further credit. If you choose to sell assets to clear your debt, this will not remove any negative information from your credit file. Contact us for advice.