Informal Repayment Plan
An informal agreement with your creditors to reduce your monthly repayments to an affordable level.
What Is An Informal Repayment Plan And Why Use One?
If you find that your debt is becoming out of control and you can no longer afford to meet the required monthly payments, you may be tempted to borrow more money (from credit cards or your bank overdraft) just to keep up the payments. This process is known as “Robbing Peter to pay Paul”. You should avoid this at all costs. An alternative may be to contact all your creditors and negotiate reduced monthly payments to fit within a budget you can afford – you can do this informally with an informal repayment plan or formally (if your debts are £15,000 or more) with an IVA.
How Will an Informal Repayment Plan Help?
The Informal plan gives peace of mind as you know that you are starting to repay your debt rather than making it worse by “Robbing Peter to pay Paul”. Depending on how much you can repay each month, you may be able to repay your debt in full within a reasonable time. However, at the very least, this plan will give you a breathing space from your creditors while you concentrate your efforts on trying to increase your earnings.
One word of warning however – all of your creditors will need to agree to your informal repayment plan and, in being informal, creditors have no legal obligation to stop adding interest and late payment charges. This means your debt can increase over time. Furthermore, you are not protected (as this is an informal solution – only formal solutions offer this protection) so your creditors can still take further action against you.
Also, in decreasing your payments, you will be making your debts more manageable but will inevitably take longer to be debt free. For example, if you owe £10,000 and normally repay this at the rate of £200/mth, you will be repaying this debt for 5 years. However, if you reduce your monthly repayments to £100/mth to fit your budget, you will be repaying your debt for at least 10 years. What’s more, even this is not a guaranteed length of time, because additional interest and charges may be added. This means that there is no light at the end of the tunnel.
Who Can Use an Informal Repayment Plan?
This solution can be used by anyone who has a debt problem. However, they are generally suited to debts of less than £15,000 with less than 4 different creditors. Ideally you should be able to afford a total monthly payment of at least 1% of your total debt.
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INFORMAL DEBT REPAYMENT PLANS ADVANTAGES/DISADVANTAGES
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It is unlikely your assets will need to be taken into account e.g. equity in your house, cars etc.
Creditors have no legal obligation to stop adding interest and late payment charges. Therefore, your debt may increase over time.
