How to deal with Hire Purchase debt

What is Hire Purchase/ Conditional Sale?

Although people often talk about "buying on HP", Hire Purchase Agreements are quite unusual these days. Cars are the most usual goods sold under Hire Purchase or Conditional Sale Agreements. With Hire Purchase and Conditional Sale Agreements, you do not own the goods until you have paid the credit agreement off. This means they are not the same as ordinary credit agreements.

On ordinary credit agreements, the goods you buy belong to you from the time you take out the credit. The lender cannot take the goods back. They can only ask you to pay the money you owe under the agreement.

This means you cannot sell the goods yourself without the creditor's written permission. If you sell the goods without permission, it can be a criminal offence.

If you are not sure what type of agreement you have, check your contract.

What If I Cannot Afford To Pay?

If you fall behind with your payments on a Hire Purchase or Conditional Sale Agreement, the creditor may be able to repossess the goods. Look at your agreement. There will be a box telling you how much you need to have paid to stop the creditor taking the goods back without a court order. This should be a third of the total amount owed under the agreement.

If you have paid more than a third of the total owing, the creditor must go to court to ask for the goods back. They cannot just come round and remove them. Even if you have not paid more than a third of the agreement, the creditor will need an order from the court to remove the goods from "any premises" they are on.

This appears to include your garage or drive but not a car park or roadside. If your car is parked on the road, or in a public car park, then it would be at risk.

What Is The Procedure If The Creditor Has To Go To Court Before They Can Get The Goods Back?

There is still a chance that you can keep hold of the goods, as the court has the power to agree to this as long as you can pay the debt back in reasonable installments.

If you have paid more than a third of the total owing under the agreement, the creditor will ask the court to send you a claim form asking for the goods to be returned. This is called an application for a "Return Order". Notice of a hearing date with a District Judge is included. This hearing should be in your local county court.

There will be a form with the claim that you should fill in and send back to the court within 14 days. You must fill this in if you want the court to suspend the Return of Goods Order and allow you to keep the goods at home. You need to offer to pay the debt back in monthly instalments you can afford. It is important to treat this debt as a priority over ordinary credit debts and offer as much as you can.

Send the form back to the court, not the creditor. The court will send a copy of your form to the creditor. If the creditor accepts the offer the hearing will be cancelled. If the creditor does not accept the offer the hearing will go ahead.

You must attend the hearing. The court will decide at the hearing whether it will suspend the Return Order and what monthly instalments you should pay from now on. If you do not fill in the admission form there will be a hearing anyway. If you don't go to the hearing the court will probably grant the creditor an order telling you to return the goods.

What If I Have Paid Less Than A Third And The Creditor Wants The Goods Back?

If you want to keep the goods and make a payment arrangement with the creditor you may be able to do so if you can afford the full monthly instalments plus something towards the arrears. If you can't make the full payments, the creditor may agree to reduce the payments, but usually by a small amount and only for a short time. In certain circumstances you may be able to go to court and ask to pay less than the full monthly instalment and extend the length of the agreement. This is called a "Time Order".

The court will only usually look at making a Time Order to reduce your payments for a temporary period. If you have a drop in your income that is permanent you may no longer be able to afford to make more than token payments to the lender. If this is the case then you may have to decide whether you can realistically afford to keep the goods any more. You need to decide the best way of ending the agreement.

How Much Will I Owe If The Agreement Ends?

If you have to decide whether to end a Hire Purchase or Conditional Sale agreement there are two options:

• return the goods;

or

• let the creditor end your agreement and repossess the goods.

There can be a difference in the amount you end up owing depending upon how the agreement is ended.

You End The Agreement

If you decide to end the agreement voluntarily and hand back the goods to the creditor, you should only have to pay up to half of the total figure on the original agreement, minus what you have already paid, plus any arrears from missed instalments and damages to the goods (in certain circumstances).

The Creditor Ends The Agreement

If you fall behind on the agreement, the creditor will terminate the agreement in writing. They must send you a "Default Notice" under the Consumer Credit Act 1974. They will then order you to return the goods. You may have to pay the full amount owed on the original agreement, minus what you have paid and minus the amount the creditor gets back from selling the goods.

What Happens Once The Car Has Been Returned?

Once the car has gone back to the creditor, they can try to recover any balance still owed from you. You can treat the debt as an ordinary credit debt and make an offer of payment using the pack and your personal budget. If the creditor does not accept your offer, they can sue you in the County Court for the balance. If you dispute the balance they say you owe, then it is important to write to the creditor and tell them. This may be because they are claiming you damaged the goods. You may have to put a defence in when they send you the county court claim form.

If you put in a defence, there will be a hearing at the county court where the District Judge will make the decision about how much you owe. The judge may decide that you owe less than the creditor has claimed. You will then have a County Court Judgement which you can offer to pay in instalments that you can afford.

Also the creditor may work out the amount you owe using a different calculation to those shown below. Phone us for advice if you want to dispute the balance.

The Office of Fair Trading agrees with this way of working out the debt owed but creditors often dispute it.

If you have a Hire Purchase or Conditional Sale Agreement and you are not sure what to do, phone us for advice. It would be helpful if you have your credit agreement with you when you call.

Example Agreement

How The Amount You Owe Can Differ:

Total price on Hire Purchase Agreement	£4,000
Amount you have paid off	£1,600
Arrears (unpaid instalments)	£200
Damage to goods	£250
Value/sale proceeds of goods	£900
"Option to Purchase fee"	£5

If You End The Agreement

Half the Hire Purchase price		£2,000
Amount you have paid off	minus	£1,600
Equals		£400
Damage to goods	plus	£250
YOU WILL OWE		£650

Creditor ends agreement

Total Hire Purchase price		£4,000
Amount you have paid	minus	£1,600
Sale proceeds	minus	£900
"Option to purchase fee"	minus	£5
YOU WILL OWE		£1,495

This document was provided by National Debtline

Remember:You can always phone us for advice about any difficulty you are having in dealing with your debts:

0808 808 4000

© Copyright: National Debtline 1994 (revised June 2001)
Whilst we endeavour to keep our factsheets as up to date as possible, National Debtline cannot be held responsible for changes in legislation or for developments in caselaw since this edition of the factsheet was issued.