I don't advocate or encourage debt avoidance but I thought I would share a pearl of wisdom from my old debt recovery days.
Obviously, this information doesn't constitute legal advice and is only valid (as far as I know) in England & Wales.
This piece of information is regarding using new money to pay off old debts. Here is an example:
You missed your last council tax payment for last year. During this new council tax year you make a double payment in one month to pay off the missing payment. The council put the extra payment you made towards this years bill instead of last years and then demand payment for last years bill.
Another situation would be where you had two debts with a bank. You make a payment to them and they take it off the newest debt.
There was a court case a few years ago (the name escapes me at the moment) which established a precedent for these situations. In a nutshell, the new money you pay must go to pay the oldest debt you have. In the first example above, the council have to pay the debt first and then the current liability. In the second example, they must pay the oldest debt first and then the newest.
So why do creditors put your new money to new debts? Well, a creditor has more options for recovery if you have defaulted. By putting the money to a newer debt, they increase the age of the older liability so they can issue a formal demand. Also, it makes their figures look better if they can "turn around" a new debt quickly while the older debt has already most likely been written off in their own books already. Any lender must have provision for bad debts - this is to cover themselves in the event that they don't get paid. When a lender has had a bad debt for a while they will write it off their provision for two main reasons - firstly it looks better on the balance sheet to keep provision down and secondly because they get tax breaks on the write-off.
What can you do if this has been done to you? First things first, write a letter, email or fax to the company involved. Tell them what has happened and explain to the that the money you paid was intended for the older debt. If they refuse to transfer the credit you need to insist that this is done. Explain to them that this has already been established by legal precedent and that your payments should go to your oldest debt first.
What are the ramifications of this? Well, it could cause you to default on a newer liability by paying the older one. It could also cost you more in interest and/or charges.