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Consumer rights: 'I have got into a mess and a friend has offered me a loan. Who do I pay first?'

A struggling charity adviser is caught between his mortgage and card debts

Q. I have got myself into a real mess financially. I have been finding it difficult for some time to get enough work and have been living off credit cards. I work as a consultant to various charities but the work has been drying up.

We are up to the maximum on our cards and about to miss a mortgage payment. I have applied for benefits but they're in the pipeline.

A friend has offered to lend us some money until the benefit money does come through but I'm so confused I don't know what to do with that money. Do I pay the mortgage or make minimum payments on the cards so that we can keep using them?

DD, West London

A. I can see why you're worried. Strictly speaking your mortgage has to be the priority as your home could eventually be repossessed if you fall behind with payments. The mortgage is a priority debt.

Your credit cards are non-priority debts as the sanctions the lenders can take against you are a lot less severe. Your capacity to get credit in future will be affected if you have a poor payment record on your credit reference agency file and the lenders can take you to court but you should be able to work out a repayment plan before that happens.

Get help before you make any decisions. A money adviser should be able to help you to come to arrangements with your creditors, including the mortgage lender, to pay reduced payments or to defer a few payments while you sort yourself out. It might be that the best way forward is to use the borrowed money for neither of those debts but to live on while you sort out a plan.

It's not easy to sell property in some areas at the minute but if yours is one that's likely to sell quickly you might decide to sell, buy something smaller, pay off the cards and live on the loan until the sale is completed. If that becomes the plan the lender may agree to reduce your mortgage payments in the meantime. Don't panic because there are all sorts of ways in which this can be resolved but you have to stop dithering and act quickly.

Go to your nearest advice agency such as the Citizens Advice Bureau (www.citizensadvice.org.uk), call National Debtline 0808 808 4000, and if you have any business debts Business Debtline 0800 197 6026, or search online for "My Money Steps" which will help you work out a budget and give you information and advice on how to proceed.

I am a bit worried about you borrowing more money to clear debts. It is very good of your friend to offer to help you in the short term but unless they're well off problems might arise. Discuss all the possible scenarios before saying yes to that kind offer.

Q. My aunt has just died and as her only surviving relative I've inherited her estate. Since I have sold her house, sorted all her separate accounts and investments and paid of the inheritance tax and probate fees etc, I'm left with a substantial sum of money. Now I have to work out what to do with it.

In the long term I may give some to charity and to friends and invest the rest. But my solicitor has warned me that I shouldn't keep it all in one account while I make my decisions. I know the interest rates are very low and inflation is eating into the real value of the total sum, but I'd rather have that than make rushed decisions which turn out to be wrong. Can you give me any advice?

LJ, Northamptonshire

A. Given the latest inflation figures your money is being eaten away in an ordinary bank account, but I think your solicitor is probably also warning you to put your money into a series of regulated accounts so that it is protected. He means you should split the money up and put chunks into deposit accounts with different financial institutions until you have a plan, rather than risk losing any of it should something go wrong in the financial sector as it did a few years ago. Bear in mind that some financial institutions include several banks or building societies.

If a bank, building society or other "deposit taker" such as a credit union went bust you would be able to claim £85,000 back through the Financial Services Compensation Scheme but you'd be likely to lose anything over that limit.

Mark Neale of the FSCS says: "If you split your money up into deposit accounts with different financial institutions up to £85,000 in each, it will all be safe while you ponder. However you must make sure that you don't choose accounts in banks or building societies which are members of the same financial institution. For example you will only be protected for one £85,000 if you have accounts with both the Halifax and Bank of Scotland because they belong to the same financial institution."

An Independent Financial Adviser will be able to advise on the rules about giving money to relatives and charities, and tax planning. Check www.unbiased.co.uk.


Do you have a consumer complaint?

Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF