While many people are tempted to bury their head in the sand as their finances erode and debts increase, this does not help from a practical or mental point of view. There are numerous formal arrangements which can be considered to address mounting debt issues but approaching your creditors at the first sign of trouble can prove very productive – a repayment arrangement. It not only offers the opportunity to give you some breathing space but perhaps more importantly to take control of an issue which can sometimes spiral out of control.
Is a repayment arrangement plan the best option?
Unfortunately, we often see individuals experiencing financial distress and looking for short-term relief with the hope of reintroducing a long-term viable solution. While it is admirable to attempt to repay your debts in full, sometimes this may not be the right move. For example, if even after cutting your budget to the bone you had relatively little surplus available for a repayment arrangement then you may end up spending years chipping away at your long-term debt and make very little inroads. In this scenario it would be sensible to take professional financial advice because it may be appropriate to consider more formal arrangements such as IVAs or even bankruptcy.
Approaching your creditors
When approaching creditors with a repayment arrangement, the proposal needs to be practical and well thought out. The first thing to do is to put together an accurate budget going forward which details your living expenses and a +realistic amount you can put towards unsecured debts in the short term.
Even though some creditors will not consider repayment arrangements until you are in arrears, it is sensible to approach your creditors when you realise your financial situation has changed/is changing for the worse. They will ask questions, they may request adjustments to a proposed repayment arrangement but if a short-term repayment arrangement allows you to get back on your feet, they should receive the debt in full in due course. Most creditors will take a long term view of the situation and may consider a short term financial hit if there are longer term benefits.
Reviewing your expenditure
It is only when you sit down to review your expenditure that you will fully understand where your money goes, where you can make potential savings and what you can realistically pay towards your debts. You may be surprised, you may be shocked but without this process you will not be able to put forward a realistic repayment arrangement. Slowly but surely you will be able to remove some of the additional/luxury expenditure which you can go without while you get back on your feet. Those who go through a repayment arrangement can often feel empowered, a sense of control and more positive as they are actually doing something about their situation.
On the flipside of the coin, you also need to be realistic with your budget. If there are certain expenses which you cannot remove or reduce then don’t present a budget to your creditors suggesting otherwise. The chances are you’ll only get one opportunity to negotiate a repayment arrangement. If you are unable to stick to your budget, or your budget is unrealistic, then your creditors may refuse your offer and could take legal action to obtain repayment in full.
How much should you offer your creditors?
Once you have considered your income and expenditure, arriving at a surplus which can be put towards debt repayments, you then need to apportion proposed repayments based on the level of debt. For example, if one creditor represented 70% of your overall debts then in theory you should apportion 70% of surplus funds towards that creditor. The report you produce should detail all creditors so that everybody is singing from the same hymn sheet and aware of the overall situation.
In general, repayment arrangements tend to relate to
unsecured debts such as credit cards, personal loans, overdrafts and store
cards. There will be occasions where secured lenders would enter into such arrangements,
but these would be considered on a case-by-case basis. Where there is a
guarantor, lenders may be less likely to consider such an arrangement because
the debt is effectively guaranteed by a third party
Repayment arrangements – looking at the long term picture
At the outset you should consider a repayment arrangement as a short-term solution to a long-term challenge. The idea is simple; approach your creditors, outline your situation and present a budget for repaying debts going forward. Ask them to refrain from adding additional interest/charges to your debt so you can at least make some headway in the short term. As we touched on above, the majority of creditors may take a long-term view on your repayment arrangement. Assuming this short-term arrangement allows you to “get back on your feet” you should then be in a position to revert back to a more traditional repayment schedule.
The key to a successful repayment arrangement is to present your overall situation and finances in a detailed and realistic light. You may recently have lost your job, illness may have affected your income or you could be experiencing relationship issues. It is vital that you paint an overall picture as opposed to just focusing on your finances and not addressing the reasons why your financial situation has changed.
Repayment arrangements and credit ratings
In simple terms, as you are effectively breaking your original loan contract when looking to secure a short-term repayment arrangement this will be noted on your credit file. Obviously, this will impact your ability to secure finance going forward but in reality, this is the least of your worries as you look to address your financial challenges. Once you are back on an even keel and making debt repayments on time you will be able to rebuild your credit rating going forwards.
The idea of pursuing a viable repayment arrangement not only allows you to take control of your financial situation but also shows creditors you are facing your short-term challenges head-on. If you can present a workable budget with built-in debt repayments your creditors are likely to give your plan serious consideration. They may also consider freezing interest and additional charges in the short term as increasing your debt would be counter-productive.
Any proposed repayment arrangement needs to be practical and workable otherwise your creditors may be forced to consider other options. However, many people have negotiated very successful short-term repayment arrangements which allowed them to get back on their feet and eventually return to normal debt repayment schedules.