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 how your creditors are likely to react and the questions people often ask.
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 and divide that amount between your debts pro rata. This means that you are paying most towards 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 credit cards, catalogues and loans is the best approach. ]
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 £1 payment to both debts it’s easy for you. And your creditors can see what you are doing and you are showing that you aren’t ignoring any debts.
The “token amount” could be more if you can afford it. With £12 to divide between two debts, you could offer them both £5 say.
You can’t make token payments to priority debts
Token payments only work with consumer debts such as loans, credit cards, catalogues.
Priority debts such as rent, mortgage, council tax, electricity and gas bills, and Hire Purchase have to be treated differently. There is a list of priority debts here, and some ideas about where to go to get help with the different types of priority debt.
If you have priority debts, a typical plan is to make arrangements to pay them as quickly as possible and pay your other debts such as loans and credit cards a £1 a month token payment until the priority debts are clear. Then you can start paying off the remaining non-priority debts much faster.
Will the lenders really accept just £1?
Yes! The regulator suggests that lenders should accept:
token payments for a reasonable period of time in order to allow a customer to recover from an unexpected income shock, from a customer who demonstrates that meeting the customer’s existing debts would mean not being able to meet the customer’s priority debts or other essential living expenses (such as in relation to a mortgage, rent, council tax, food bills and utility bills).
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 phone calls etc.
If you know nothing much is going to change for a long time, then it’s good to look at your other debt option, see What is Your Best Route Out Of Debt?
If your situation is likely to improve – when you get a job, or your childcare costs fall for example – token payments can often be a good move. StepChange calls this a “temporary plan” and that 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.”
One common situation is where you have a priority debt that has to be repaid first. For example, you may 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 on your credit cards, so you offer them a token payment. When your council tax arrears are cleared, you can then stop making the token payments and divide the £80 between your credit cards.
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. You can use the free CABMoney system to generate this to send to your creditors, or a debt advisor can help you draw one up.
Sometimes a creditor won’t accept a token payment straight away. They may say it’s not enough, you need to pay them at least £15 a month before they will agree to freeze interest. Ignore this! If all you can afford is £1, then that is all you should pay.
If a creditor hasn’t frozen interest after a few months, put in a complaint to them.
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 around this – if you can only afford to pay a small amount, then defaults are going to happen.
But this is often better than having an Arrangement to Pay marker on your credit records, because it will disappear much sooner! See How does a DMP Affect My Credit Rating? which explains this in detail.
Will my debt be sold to a debt collector?
After a while – six months or a year, many creditors will decide your problems aren’t temporary and will sell your account to a debt collector.
This isn’t a problem. If you are making monthly payments and communicating with your creditors, this just carries on with your new creditor. It’s often easier to reach an agreement with a debt collector than the original creditor.
There is no point in struggling really hard to pay more than you can afford to try to avoid your debt being sold. It’s likely that the debt would have been sold if you were paying £20 a month, it isn’t only the £1 token payments debts that are sold.
Will I have to go to court?
It is possible at some point in the future, but this is very unlikely to be soon if you have shown the creditor your Income & Expenditure statement.
A creditor who is kept informed won’t usually decide to sue quickly.
The only exception here is if the debt relates to your business and the creditor knows you have a house with equity
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 don’t let this possibility stop you from making token payments initially if they are your best, temporary option.
When to end a token payment plan
Because a token payment plan will never clear your debts, you should try to end it as soon as possible – don’t get comfortable with making those £1 payments, it can’t last!
There are four different reasons why you should stop making £1 payments:
- your situation has improved a lot so you can resume making the normal payments to the debts;
- there has been some improvement, enough to let you start making more sizeable debt management payments;
- you have had a windfall such as inheriting some money, getting a good bonus from work or a PPI or payday loan refund. You could use this to make full and final settlement offers on some or all of your debts;
- you have realised your situation isn’t going to improve. It may be better to opt now for a Debt Relief Order or bankruptcy, rather than let the situation drag on.
If you have been making token payments for several years and the debts have been sold on, you could think about asking for the CCA agreement for the debt – if the creditor can’t find it, you may be able to stop paying.
How can I tell if token payments are right for me?
If you are unsure take some good debt advice, see Good places for debt advice, as where to go depends on where you live, and the type of debt problems you have.