A reader, Mr P, asked:
I have debts of around £30,000 on five credit cards and loans, which I couldn’t pay from last summer.
A Debt Management Plan (DMP) was set up a couple of months ago. This will take about ten years to pay off.
The DMP firm suggested an IVA or bankruptcy as I’m not a homeowner but I do not really want to get into an IVA or bankruptcy as these will affect my credit score for longer than 6 years.
I’m thinking I can borrow a maximum of £6,000 from family. So 25% each. Is it too early to suggest a partial settlement on these debts? I also have some payday loan cases with the ombudsman which I’m hoping can refund me £4-5k in interest.
The simple answer here is Yes, this is a lot too soon!
But let’s look at Mr P’s options. Some of these may be useful for you even if your case isn’t the same as his.
Lenders rarely accept low settlement offers soon after a default
It is less than a year since Mr P was unable to pay these credit card and loans. He hasn’t said why – perhaps his income fell or his expenses went up if he separated from his partner.
His creditors will be hoping that in a few years he will be able to pay them back, so they aren’t going to accept a 25% or even 50% settlement offer now.
When Mr P can show his situation is very unlikely to improve – he may have retired and be living on a State Pension, be permanently disabled or have a major health condition – a creditor may consider a low settlement offer. But otherwise, no they won’t, not for a long while.
What should I do when an F&F offer has been rejected looks at all the reasons why an offer may be refused, and if you are hoping to get a partial settlement agreed, it’s good to read that before you make the offer!
Payday loan refunds will let him offer more – but it may still not be quick
If Mr P can get several thousand pounds back in payday loan refunds, that would increase the settlement offer he could make. Possibly up to a level that a debt collector may accept once his loans have been sold in a year or so.
But the reality is that even after refunds, he will still be doing well if half of the lenders accept a Full and Final settlement offer in the next two years. It may take several more years to get his debts cleared this way. And then he would still owe a debt to his relative that lent him the money for the settlements.
His credit score will be bad for most of the next 6 years
Mr P’s credit records will be showing five defaults for most of the next six years. Getting settlement offers is not going to change that.
His DMP firm was quite right to suggest that a ten year DMP is not a great option and that he should look at an IVA or bankruptcy instead.
Mr P is was wrong when he said: “I do not really want to get into an IVA or bankruptcy as these will affect my credit score for longer than 6 years.”:
- bankruptcy will definitely go after six years except for the very rare occurrence of a long bankruptcy restriction order;
- as he isn’t a homeowner, his IVA would probably be five years. The majority of 5 year IVAs are finished and will drop off his credit record at the six-year point.
See Bankruptcy, IVA, DRO & your credit rating for details.
In this situation, it may well be better for Mr P to go now for an insolvency option. That is likely to be bankruptcy as he doesn’t have a house with equity to protect, unless he has other assets.
He didn’t mention concerns about a future mortgage but that is often in the back of people’s minds. It is possible to get a mortgage after the six year period of bankruptcy or an IVA. And he isn’t likely to get a mortgage in under six years if he waits for years in a DMP hoping to get settlement offers!
Wait a bit and see how the DMP goes?
It’s common for setting up a DMP to come as a huge relief – no more worry about creditors. And Mr P may want to wait and see how much he does get from payday loan refunds.
He could settle down in the DMP, have a go at cutting his expenses and pursue the payday loan refunds. Then think again in 6 months.
But it’s best not to wait too long. If he does decide bankruptcy is best, the sooner he gets it over with, the sooner he is out the other side.