Keep reading to find out more about token repayment plans and whether one could be a suitable debt solution for you.
What is a token payment plan?
TPPs involve paying a small amount (usually of £1) to each of your creditors and are often used as a short-term response to a dramatic change in personal or financial circumstances.
It means offering your creditors a very limited regular payment as a gesture of good-will usually for a period of between 1 – 12 months. This time can give you some breathing space to concentrate on improving your financial situation and eventually resume making ordinary repayments.
How do token payments work?
Many debt solutions involve working out how much spare income you have after essential household costs have been deducted and paying the remainder to your creditors on a pro-rata basis. This means that you will pay the most towards your largest debt, an approach that creditors generally accept as fair.
On the other hand, token payments work by showing your creditors that whilst you cannot afford to pay the full amount that is expected of you, you are not simply ignoring your debts. You will pay a token amount (usually of £1, or more if you can afford it) to each of your creditors on a regular monthly basis. This both simplifies the process of paying multiple creditors and helps to lift the pressure of having to repay a more substantial amount.
Because token payment plans are intended as a short-term response to an unexpected financial shock, they are not a suitable long-term debt solution and will not clear your debt. Whilst your creditors may agree to freeze interest and charges against your loan for the duration of a TPP, they are not obligated to do this and there is no guarantee that your debt will not increase.
Which debts can I make token payments for?
Token payment plans can work for a variety of consumer debts, for example, personal loans, debts from store or credit cards, or catalogue payments.
You cannot typically deal with priority debts with a TPP, as failing to pay what you owe may not be accepted by priority creditors and could have very serious consequences. Priority debts include rent or mortgage payments, council tax, utility bills, and court fines. These are debts that keep you going with a roof over your head and the lights on – so should always be treated as a primary concern.
Is a TPP suitable for me?
A token payment plan is suitable only for debtors who can only afford to pay a nominal amount towards their debts and expect their situation to improve in the relatively near future.
Generally speaking, this means that a TPP will only be suitable if your income only just covers your essential household payments (including rent, utility bills and groceries) and your situation is likely to change relatively soon – for instance if you have taken a new job or are about to finish a period of maternity leave.
Can creditors refuse an offer of payment?
Creditors can refuse a partial payment through a TPP, as failing to make the payments you originally agreed to could be considered a breach of your contract.
The first step towards doing this is sending a token payment plan letter which communicates your issues to your creditors. Some debtors provide their creditors with a schedule of their income and expenditure to evidence why they need relief from their debts. Although there is no guarantee that creditors will accept an offer of a TPP, showing them the reality of your situation can help to make working with them easier.
Do debt collectors accept payment plans?
Although debt collectors can seem intimidating, in many cases their approach to handling debt is similar to other creditors. Whilst debt collectors are not required to accept payment arrangements, they may well do so depending on a debtor’s individual circumstances – although suggestions of a long term payment plan might not be looked at favourably. A short-term token payment plan is by no means out of the question and may be accepted by a debt collector if you are able to demonstrate that you can only afford to repay a nominal amount. Regardless of your circumstances, if you are being pursued by a debt collector or creditor you may face enforcement action and seeking the advice of a qualified financial advisor could help you to decide on the steps needed to deal with your debts.
Will a token payment plan affect my credit rating?
Being on a token payment plan will have an impact on your credit file. This is because a TPP involves paying less than the minimum payment amount agreed with your creditors when you originally took out the debts. Lower repayments will be flagged within your credit file and this can lead to a lower credit score.
If your token payment plan lasts for longer than a few months, your debts may be marked as defaulted on your credit file. This can have very serious implications for your credit rating and ability to access further credit, but a default marker will usually be removed from your file after six years.