A reader asked if he should offer a token payment to his debts, wondering if his creditors would ever accept it. The simple answer is that you should make token payments offers IF it is all you can afford AND you expect your situation to improve at some point. Let’s look at the problem in detail, including how your creditors are likely to react.
What is a “token payment”?
Normally if you can’t make the usual monthly debt payments, you should work out what you can afford to pay across all your debts and divide that amount between your debts “pro rata“. This means that you are paying most to the largest debt. Creditors accept that this is the fairest way of making reduced payments in a debt management plan.
But if you have very little money for your debts, offering a “token payment” of £1 a month to every debt is also acceptable. This has the big advantage of being simple – there is no point in messing around with calculations that would pay £2.35 to one debt and 68p to another. By making the same small payment to everyone, you are showing that you aren’t ignoring your debts.
The other common situation is where you have a priority debt that has to be repaid first, for example if you reach an agreement with your council to clear your council tax arrears by paying an extra £80 a month for four months. That doesn’t leave you with enough to make the minimum payments to your credit cards, so you offer them a token payment. When your council tax arrears are cleared, you can then divide that £80 between your credit cards.
Why does it matter if my situation is likely to improve?
Token payments aren’t going to clear your debts! If you make token payments for a few years, your debt problem isn’t going to go away or get smaller, you will still get letters and phonecalls etc. Even though your creditors may be happy with token payments for a bit (see below) if you know nothing much is going to change for a long time, then you should find out about your other debt options. Have a look at What is Your Best Route Out Of Debt?
But if you think your situation is likely to improve – when you get a job, or clear your priority debts, or your childcare costs fall for example – then making token payments can often be a good move. StepChange calls this sort of debt management plan a “temporary plan” and this is a good way to think of it. As they say, “This will give you the breathing space you need to get your situation back on track.”
Will my creditors freeze interest?
This is the key question. If your creditors don’t freeze interest or keep adding on extra charges, then your debts will actually be going up every month.
The answer is that creditors don’t legally have to freeze interest, but most creditors will if you provide them with an Income and Expenditure sheet that shows you can’t afford to pay more. A good way of doing this is to use the free self-help CABmoney facility – this will generate the Income and Expenditure sheet and also the letters to your creditors. If you can afford more than token payments, it will calculate the pro rata offers as well.
Will I get defaults on my credit record?
If you make token payments for more than a couple of months, you will probably find that your debts have been marked as ‘defaulted’ on your credit records. This is likely to happen even if your creditors agree to freeze interest. There isn’t a way round this – if you can only afford to pay a small amount, then defaults are going to happen.
It may not be a bad thing however! How does a DMP Affect My Credit Rating? looks at this in more detail.
Will my debt be sold to a debt collector?
Many creditors will keep your account for 6 months or a year to see if you go back to the usual monthly payments, and they will sell your debt if you don’t. They may well have done this even if you weren’t making token payments – there is no point in struggling really hard to pay a few pounds a month instead of one pound, that probably won’t make a difference.
Having a debt sold is not a major problem anyway. If you are making monthly payments and communicating with your creditors, this just carries on with your new creditor. This is not something to worry about.
Will I have to go to court?
It is possible but not likely. Most people making token payments are not taken to court for a CCJ if they have supplied their creditor with Income and Expenditure details. A creditor who is kept informed won’t usually decide to sue quickly.
As time goes on, a creditor may be more likely to think about going to court if you are still making low payments and appear to have a good income or a house with equity. This is another reason why long token payment plans are not a good idea, but you shouldn’t let worrying about this possibility stop you from making token payments initially if they are your best option.
Can I make token payments and save up for a settlement offer?
Some commercial debt management companies suggest this as a “Debt Settlement Plan” – they take your monthly payments, make token payments to your creditors and say they will save up the rest for later full and final settlement offers. This might sound like a great idea, but there are two big problems with it:
- your creditors may look at your Income and Expenditure sheet and decide that you should be paying more each month than £1, so they don’t freeze interest and your debts keep going up; and
- some firms that offered this have gone bust and their clients then found their money wasn’t safely saved at all. The clients in this case in 2014 lost a lot of money.
Basically this is not a good option for most people and should be avoided. Of course if you do get a windfall, perhaps a big bonus, or some reclaimed PPI money you can use this for a full and final settlement offer, that’s fine. But don’t set out to only pay token offers when you can really afford a lot more.
How can I tell if token payments are right for me?
If you are unsure take some good advice. StepChange is one good source. The Debt Counsellors is another option – they are a comparatively new charity who mostly help clients who need Debt Relief Orders or very low payment DMPs.