How does a payment arrangement work & is one right for you?

A typical payment arrangement is an agreement to repay a credit card, catalogue or loan in affordable monthly amounts. This is also called an arrangement to pay.

The key points are:

1. an arrangement is needed if you can’t afford the normal debt repayments;
2. do not offer more than you can afford;
3. ask the lender (or the debt collector) to freeze interest and not add any charges;
4. it normally harms your credit record.

This article looks at making an arrangement to pay, including how to do this, how much to offer and what if the creditor says No.

Is a payment arrangement right for you?

Debts this doesn’t cover

The arrangements discussed here are for “normal” loans, credit cards and catalogues.

Bills such as tax, rent, council tax and utilities are different, see What is a priority debt? for a list of these. Here setting up an arrangement to pay is a very good idea, but you may need to pay more to get the creditor to accept your offer. You have to negotiate these priority debt arrangments first, and your credit cards and loans may then have to accept a token £1 a month payments until your priority debts are cleared.

Where a lender has some extra security, they will normally refuse to accept a lower amount and freeze interest:

• mortgages and other loans secured on your house;
• guarantor loans or logbook loans; and
• car finance by HP (including PCP) or leasing.

If you have problems with any of these, talk to a debt adviser about your options.

What about overdrafts? An overdraft on an account you aren’t using any more is just like any other bank debt and you can ask for an arrangement to pay that. If you are still using the account though, you need to talk to the bank about what they can suggest – and if it doesn’t seem helpful, think about switching to another bank. Overdrafts can be very tricky to clear.

The advantages of a payment arrangement

• a payment arrangement for a few months gives you time until your income or expenses improve so you can resume normal payments;
• for longer-term problems, a payment arrangement where interest is frozen lets you clear the debt more rapidly and in a more affordable way;
• you can increase or decrease what you pay if your situation changes;
• most creditors will accept a payment arrangement and agree to freeze interest if you explain your circumstances;
• having a payment arrangement means you normally get few letters or phone calls from a creditor; and
• it is less likely a creditor will take you to court for a CCJ than if you ignore a debt.

Some disadvantages of a payment arrangement

• a lender may reject your offer or refuse to freeze interest (see below for what to do if this happens);
• it may take a long time to repay your debts, even if interest is frozen. In this situation, it is better to take debt advice now than to spend years not making much progress;
• a creditor may take you to court for a CCJ even if a payment arrangement is agreed. This is unusual – it is more likely for larger debts and if you are buying not renting as the creditor can then get a charging order on your home;
• you have to deal with your creditors – some people don’t mind this, others prefer to get some help (see below);
• arrangements may be for a short time such as 6 months. This is a nuisance, but if at the end of it you explain your situation is the same, the arrangement is normally renewed;
• your credit rating will be affected (see below).

How much should you offer?

National Debtline’s Your budget takes you through setting up a personal budget, converts your income and expenses so they are all monthly, works out what offers you should make to your creditors and generates a budget sheet to send to your creditors.

The offer to a creditor depends on how much money you have left after paying for essential expenditure and paying priority debts. This is divided between your credit card and loans, so that the larger debts get more of the money. This is called a pro rata division and your creditors will think this is fair. They will also understand that priority debts will get more.

If you have little money left, the budget tool will suggest:

You could offer a token payment of £1 per month to each of your creditors. This may only be a short-term solution but it can give you some time to work out your other options.

Your budget has to be realistic for many months, so don’t put in really low expenses that you won’t be able to live on. If you aren’t sure, phone National Debtline and talk to them about what figures are reasonable. Make sure you save your budget, in case you want to change/add something later and create a new budget sheet.

Phone or write?

If you want to phone, it’s best to have worked out a rough budget beforehand and decided how much to offer each creditor.  A creditor will often want to talk through your budget with you. Having one in front of you will mean you are more confident and less likely to agree to pay more than you can afford.

Also work out a short description of the reason you have problems to tell the creditor. “My hours have been cut” or “My wife has gone on maternity leave” or “I am behind with council tax and my electricity bill and need to clear these arrears” – just say what has happened, you won’t be judged.

If you prefer to write, you can send a letter but email is faster, cheaper and you have a record of what you have sent. Enclose a budget sheet – this shows the lender that you are making a fair offer.

National Debtline has useful template letters you can use. Here the most important ones are:

• making a pro rata offer to creditors
• making a token offer to creditors.

What if the creditor doesn’t agree?

You can’t make a creditor accept, but if you have sent the creditor a budget sheet and you are making pro rata offers to all your creditors, they normally do. So don’t worry about this problem until it happens, as it may not!

In practice, you often don’t have any better options. If you can’t afford to make the normal repayments – which your budget shows – then don’t get into more difficulty by paying more than you can afford. So make it clear that you are not going to increase your offer.

Sometimes a creditor will refuse to make a payment arrangement if you are up to date with the debt. This is annoying when you are trying to do your best but the answer is simple – miss a payment. Cancel any direct debit, standing order or continuous payment authority with your bank and contact the creditors again in a month.

Sometimes a creditor will refuse a payment if they think it’s more than you can afford. If this happens, talk to a debt adviser about your other options.

What is the difference between a payment arrangement and a Debt Management Plan (DMP)?

Not much!

In a DMP, you go to a firm such as StepChange and ask them to set up the payment arrangements with your creditors, and you then just pay the DMP firm one amount monthly which they divide between your creditors. See A guide to DMPs for more details.

The end result for you – and for your creditors – is much the same. Some people like a DMP firm sitting in the middle and organising it as they don’t have to deal directly with their creditors. Some people prefer to do things themselves. If you have a lot of creditors it can be easier to get a DMP set up, but if there are only a couple it’s not that much hassle to do it yourself.

Creditors are not allowed to refuse to set up a payment arrangement with you and say you have to have a DMP. And they can’t refuse to freeze interest if you are trying to make a payment arrangement and say they only do that for a DMP.

A payment arrangement also has the same effect on your credit record as a debt management plan. See how DMPs affect your credit record for details.

Need some help with this?

If this is the first time you can’t make a debt repayment, or you haven’t paid anything for a long while, you may be worried.

It normally won’t be as bad as you think!

Creditors are used to this, it is part of their business that some people can’t manage to repay on time and their regulator says they have to treat customers in financial difficulty fairly.

But if it makes you feel very anxious, or you have many creditors it feels difficult and confusing to speak to them all, or you aren’t sure if an arrangement to pay is right for you, or a creditor refuses to accept your offer, then there are places where you can get free and confidential help:

• go to your local Citizens Advice if you would like to talk to meet a debt adviser in person;
• phone StepChange if you would prefer to talk to a debt adviser on the phone.

---