Arranging debt repayment plans with creditors

A debt repayment plan is an agreement between you and the people you owe money to - your creditors.

This type of arrangement lets you pay what you can afford over a set period, so you can manage your debts better.

It’s similar to a debt management plan, only you negotiate the reduced payments rather than a debt management company.

It’s generally used for unsecured debts like:

• credit card debts
• personal loans
• catalogue debt
• store card debt
• overdrafts

Just be aware that if you’re paying less each month, it may take you longer to repay your debts. You may also end up paying more in total unless your creditors agree to freeze interest and charges.

To set up a debt repayment plan, start by working out your budget.

This should include:

• your monthly income
• housing and utility costs (rent, mortgage, bills)
• living costs like food, travel and clothing
• any existing debts

Use our free budget planner to get started.

Once you’ve worked out how much money you have left over after paying for essentials, you can contact your creditors and explain your situation. 

Let them know how much you can afford to pay each month and why you can’t keep up with the full payments right now.

For example, you might have had a change in your circumstances, such as losing your job.

You can ask for interest and charges to be frozen, and that no further legal action be taken against you, but there’s no guarantee your creditors will agree to this.

You could also request payment dates that best suit your financial situation.

Once an arrangement has been agreed, make sure you get confirmation in writing.

Once you know how much you can spare each month for your debts, the money should be divided fairly between your creditors.

Here’s how to work out what to offer each creditor:

• Add up your total debts.
• Work out how much you owe each creditor.
• Divide the amount owed to each creditor by the total debt.

This will give you a percentage for each creditor. Offer to pay them this amount of your disposable income.

Example

Total debts: £2,000

You owe creditor one: £500

£500 ÷ £2,000 = 0.25 (25%)

This means you should offer creditor one 25% of your disposable income.

If you have £200 left over after covering essentials, you would offer them 25% of £200, which is £50.

Pay priority debts first and make sure you have enough money to cover your ongoing bills before dividing up the remaining disposable income between your non-priority debts.

Priority debts are the ones that could have the most serious consequences if you don’t pay them, such as losing your home. If you fall behind with priority bills, try to catch up as soon as possible. Priority bills include things like: 

• rent
• council tax
• energy arrears
• court fines

Once you’ve paid off any priority arrears, try to keep up with your ongoing payments moving forward. If you’re struggling to cover your priority bills, get debt advice straight away.

Most creditors will agree to a reasonable offer, especially if you explain your circumstances clearly by phone, email or letter. 
 
When you contact them:

• outline your financial situation
• show them your budget
• explain why you can’t afford the full payments
• make a fair offer based on what you can afford

If a creditor refuses your offer, don’t give up.

You may be able to increase your offer if you can trim your budget or take steps to maximise your income e.g. checking you’re claiming all the benefits you’re entitled to.

But don’t offer more than you can afford.

And make sure you don’t offer any creditors more than their fair share.

If you miss an agreed payment in the plan you’ve negotiated:

• the arrangement may be cancelled
• interest and charges could be applied
• creditors may ask to review your arrangement

Your creditors will probably want to carry out annual income and expenditure reviews to make sure you’re continuing to pay as much as you can afford. Failing to complete an income and expenditure review could also lead to an arrangement being cancelled.

Your credit rating is usually affected when you pay less than your contractual monthly payments.

That means lenders could see you as more of a risk and it could be harder for you to borrow in the future.

Missed or reduced payments can lead to a default, which stays on your credit file for six years.

But showing a willingness to pay back what you owe by setting up a debt repayment plan often looks better than not paying anything at all.