Part pay or total default - which is less bad?

hashtag3

A friend of mine is in difficulties, and in the process of setting up a DMP with StepChange.  This will hopefully start at the beginning of May, but they will struggle to make all of their April payments.

Will it make any difference to their credit rating / impact on their credit score, if they write and totally default on April’s payments, versus writing and offering a partial payment?

Thanks very much, I don’t have any experience I can offer my friend unfortunately to help.

sourcrates

They should not be paying the contractual repayments at all if they are entering debt management.

Advise your friend to hold off paying any non priority debt until they have saved up a reasonable emergency fund, at least 6 months, tell them not to rush into a DMP, wait and consolidate their position first.

Forget credit rating/credit score, concentrate on making the arrangement work best for them, and getting the payments down to an affordable level.

Sometime in the future when the debts have been tackled, the credit history, not score, will heal itself.

RAS

Your friend will want to mend their credit record as soon as they can. 

They must pay rent/mortgage and Council Tax in full.

They need an emergency fund for real emergencies and a budgeting account or six for planned annual expenditure and replacement. They won't be able to access credit cards so this needs saving before they start a DMP.

At the most basic if they travel to work, a season ticket cost less than daily spends. Stop paying the consumer debt, save up and get a monthly card. Leave the saving from that in the account and top-up to pay for a quarterly. 

If they need equipment, whether it's a lap-top or an iron, they should be saving for replacement rather than relying on credit cards. Ditto, birthdays and Christmas. They know the dates? Plan the expense over the year rather than panic every other month. 

The big advantage of allowing their accounts to default is that their credit record will clear fastest. Much better than arrangement to pay markers.

There will be lots of letters threatening further activity. Which means their computer is programmed to send another letter next week.

hashtag3

Thank you both.  I think their DMP is scheduled to start in May (they applied this week and heard yesterday), so Stepchange have just started the negotiations with the creditors - at least that's how I understand it.  So presumably that now can't be deferred, is it too late?  Or should they be thinking about trying to defer it for a few months whilst defaulting (which from what I've read is a pretty stressful process in itself)?

I had read a few posts about building up that emergency pot to use versus credit (which yes of course they won't be able to apply for any new cards).

Thank you again

RAS

They simply tell Stepchange that they want to stop the DMP whilst they create an emergency fund. 

hashtag3

Thank you again. So do you just “not pay” and keep quiet or do you notify the companies that you’re not paying?

RAS

Sound counter intuitive, but stop paying and keep quiet and they should default sooner. If you've sorted out your SOA properly by then, make the appropriate payment to those who've defaulted.

sourcrates

hashtag3 said:

Thank you again. So do you just “not pay” and keep quiet or do you notify the companies that you’re not paying?

Once you get to the default stage, its usual for creditors to sell such debts.

So once you enter debt management, you won`t always be doing so with your original creditors, so what you tell them makes little difference to be honest, as they will no longer be in the picture.

Rob5342

It seems completely bizarre when you first learn about it, but completely ignoring creditors to start with is far better for yoo. Once a debt defaults it comes off your credit report after 6 years, and usually gets sold to a debt collector who will often accept a reduced. If you get an arrangement to pay marker it will stay on your credit report for 6 years after the debt has been paid offz potentially for far longer and you could up repaying the whole amount.

You will  normally get put onto a payment arrangement if you start paying straight away and might be defaulted later, so it's best to stop paying to try and get a default at the very beginning.

hashtag3

Thanks everybody you've been so helpful.  I think they want to get on with paying it back and the DMP, but I think will also take April's due payments and put them into an emergency fund instead of paying them to the creditors (other than priority bills).