7. Setting up a Repayment Arrangement:
Find out how to set up a repayment arrangement with your creditors and pay back your debts in monthly instalments on a pro-rata basis (this means your payments are split fairly between your creditors).
What is a Repayment Arrangement?
- A Repayment Arrangement is an informal agreement between you and your creditors that allows you to repay your debts in monthly instalments, spread over a longer period.
- This means the lenders still get paid and you can take control of your debts in a managed repayment plan.
- You will be in charge of setting the Repayment Arrangement up with your creditors and will be responsible for keeping up with your payments.
A step-by-step guide to setting up a Repayment Arrangement
To set up a Repayment Arrangement, you will need to send a letter to all of your creditors explaining your current financial situation, along with an Income and Expenditure form to support your case. Here are the steps you need to take:
1. Fill in an Income and Expenditure form
If you haven’t already, download our Income and Expenditure form and follow the guide to filling it out. By completing an I&E, you will get a better sense of your income and outgoings and how much you have leftover to pay towards your debts. This will also give your creditors a realistic picture of your current financial situation.
2. Make a list of all your debts
These should be split into priority debts and non-priority debts. Read our guide to which debts you should pay off first and then download and complete our creditor list PDF so you can see them all at a glance.
3. Write a letter to your creditors
You should write a formal letter to all of your creditors and explain you have received advice from PayPlan on setting up a repayment arrangement, using our suggested templates as a guide. Your letter (or email) should outline why you cannot make your contractual payments to your debts right now, as well as how much you can afford to pay. This could be a token payment of £1 or more if you can afford it, split fairly between your creditors.
You can ask your creditors to freeze interest and charges on your account and although some may agree to this, it’s not always guaranteed.
You should also explain that you have completed an I&E and send a copy of this with the letter. Alternatively, you can call your creditors and explain your situation over the phone – you will still need to provide evidence of your budget.
4. Start making your payments
Once you have worked out how much you can afford to pay, you should ensure that you make these payments on a monthly basis, to show your commitment to repaying your debts.
How much should I offer each creditor?
When you need to make a reduced payment to a creditor, the fairest way to do that is to ensure you are offering a ‘pro rata’ payment. This involves offering a proportion of any available leftover income to a creditor based on the level of debt that you owe to that creditor, compared to your overall debt level.
For example, if you have a total debt level of £15,500 and surplus income of £75 and you owe one of your creditors £8,000, you work out what the pro rata payment as follows
- £8,000 (individual debt) divided by £15,500 (total debt) x £75 (surplus) = £38.70 (Pro rata payment)
You will need to follow this calculation for each of your unsecured debts. If the amount works out to be less than £1, we would recommend that you round this up to £1 as this is generally seen as the minimum payment to pay an unsecured creditor.
What should I do if my creditors reject my proposal?
If your creditors reject your repayment arrangement, you should listen carefully to their reasons and see if you can make an improved offer to them. You may be able to make savings by reducing your spending in certain areas or ensuring you’re claiming everything you’re entitled to.
In the meantime, you should continue making token payments to your creditors in an attempt to pay off your debts. Your creditors have to accept payments by law and take the total off your account. Please bear in mind that the longer you don’t repay your debts in full, the more interest and charges you could face on top of your existing debt level. This is why it’s wise to get an agreement in place to pay back as much as you can whist keeping it affordable. They may come back to you with an offer of what they’d expect you to pay.
Do I have to accept each creditor’s suggested offer?
You do not have to agree to the payment amount your creditor is suggesting if you feel you cannot afford it. Please don’t feel pressured into agreeing to something you cannot commit to and seek advice if you need further assistance. However, you should try and cut back where you can and show a commitment to paying back your debts.
How long will a Repayment Arrangement last?
It’s not certain how long a repayment arrangement will last – it depends on your individual situation and how your lenders accommodate an arrangement. It is a temporary solution that should be used until your financial situation improves – then you should seek debt advice and discuss a managed plan with a professional company.
If you enter into a Repayment Arrangement, you should bear in mind that it is not a legally binding agreement and creditors are able to cancel it at any time or add on extra interest and charges. This means it could take a long time to pay off your debts and what you owe could in fact increase over time.
Have a look at our Other debt solutions section to see if there may be more suitable options for managing your debts.