Waiting for debts to default before entering a DMP?

ChrisWLA

Hello everyone,

Over the last two years, I have been absolutely reckless with credit cards, which seems to have been caused by personality changes from several different anti-epileptics drugs I have had to take.

I am going to have to go into a debt management plan with debts totalling around £20k as I am now on a low income and the interest is kiiling me.

I know the common advice is to wait for debts to default before entering the DMP, but I am worried about further interest and charges. Some of my credit card companies have upped my interest rates to as high as 39.9% (which I think is a bit predatory considering they could see my financial situation was worsening).

With high APRs like that, what happens if they don't default quickly, and end up taking over a year for example? - I could end up in more than £30k debt with extra interest and charges.

Would you say waiting for them to default in my situation is still the right way to go?, what happens if for some reason they don't default?

Any advice would be appreciated.

Thanks

Altior

If you're already paying the standard interest then mathematically it won't be hugely more expensive. Your liabilities will rise, but you'll be retaining the payments. So your debt might be up £8K but you'll have £6K instead of the lender. It will effectively cost you the compound interest and any default fees (not the £10K in your hypothetical). Plus in most cases, once you reach default, the interest and charges will be frozen.

ChrisWLA

Hi Altior,

Thanks for the quick reply, that makes sense and has put my mind at ease a bit.

In you experience, do companies always default eventually?, how long maximum would you recommend to wait before entering the DMP? I'm just a bit worried that I could potentially be waiting for a lingering debt to default, and in the meantime have debt collectors hammering on my door for the other ones!

Thanks again.

Altior

https://forums.moneysavingexpert.com/discussion/comment/81912758#Comment_81912758

I've not actually gone through the process, but potentially about to, so have read up an awful lot in preparation. I am fortunate that I am on 0% deals and have some liquid capital, so it's not super urgent. However my income is less than my priority bills, never mind the non priority ones!

From what I have read, mainstream lenders are typically 3-6 months from missing a payment to default. They are breaking their relationship with you, so they are mandated to give you an opportunity to remedy the situation, before finalising the divorce. That's why no contact is the recommended approach if seeking a quicker default.

If the 6 months have passed, you have nothing to lose by letting them know that you are entering a DMP, and waiting for the default.

You need to determine though if you are going to DMP via one of the debt charities or self manage. If going via the charities, I have learned that there is a risk that they might not wait for a default on every debt. There is a small risk that the pro rata payment is equal or more than the contractual minimum, and it can keep attracting interest. But of course, many people feel self managing is stressful and intimidating. Personally I have a finance background so I will be self managing unless there is a good reason not to.

ChrisWLA

That's some great info, thanks.

I will just sit tight then and hope they get defaulted quick, or try and force a default if they haven't done anything after 6 months - while also saving as much as I can before going the DMP route.

I will likely be using Stepchange, as I really don't need the hassle of dealing with 15+ lenders and debt collectors on top (especially if they start selling the debts).

Unfortunately I have just broken my back from a seizure too, so I am now on what I would call a 'government income!' (aka benefits!) which is pretty low, and I will likely be on that for the next few years at least - so hopefully they won't demand too much in a monthly DMP payment. Even £200 a month for 10+ years would be stretching my budget!

So in theory, if the pro rata payment is lower than what my minimum payment would have been on the cards, does that mean they will be obliged to stop the interest? or have I got that muddled?

Altior

https://forums.moneysavingexpert.com/discussion/comment/81912780#Comment_81912780

There's definite value in engaging a debt charity to do all of the legwork. In the knowledge of those risks that I touched on. With a view to being self managed where you have more flexibility.

If an account has not been defaulted, you could get tangled up in an arrangement to pay. Interest might be frozen, but the default 6 year clock has not started. If that's important to you, an arrangement to pay only drops off the file 6 years after the account is settled. Plus it can impact potential settlement offers down the line as it will be with the original lender.

Something to be wary of, Stepchange will need to ensure that your DMP is affordable. So your income disclosed to them will need to be tangibly higher than your expenses, giving you scope to comfortably maintain the DMP payments. It's a balance between making the DMP meaningful but giving yourself as much room as possible. You might be aware that a DMP is informal so nobody will be verifying that your budgeted expenses match your actual expenses.

ChrisWLA

Yea, I would definitely like to avoid 'arrangement to pays' without a default.
I had one of those haunt me for ages in the past.

Hoping they all get defaulted then does seem the way to go for me, then once they are, start with Stepchange.

I've calculated I could afford maximum £200 a month, which will leave me enough money to pay the essentials, and also a bit spare for emergencies, I hope they accept that.

You've been a great help thanks, one last question: what would happen if one of the lenders goes for a CCJ while i'm waiting for the others to default? Does that really matter, or would the process still be the same?

Rob5342

You will get extra interest and charges but once you default the Interest will be frozen. At some point after defaulting it's likely that the debts will be sold on, and once that has happened you will be able to make a settlement offer at some point down the line which will probably more than counter the extra interest you pay now. The amount you can settle for will depend on who has bought it, but settling for 50% isn't unheard of.

If you manage it yourself then you can start paying each one as it defaults instead of waiting for them all. Self managing is very easy, you just set up a standing order and either send a quick email to say what you'll be paying or go onto the collectors website and put in the details. I'd say it's no more effort than having to give Stepchange the details of everything.

Altior

https://forums.moneysavingexpert.com/discussion/comment/81912786#Comment_81912786

No worries!

Court action is a theoretical risk, and lenders will utilise the threat of it, but again from what I have learned in preparing, the risk of a mainstream lender actually going for court action for unsecured debt is very low. Tends to only happen if there is no engagement after default or very high amounts. Credit unions are less temperate and go for court action earlier in the process. But check all physical post once you begin, file all letters, and explicitly look out for a formal letter before action. That must be taken seriously, if you were unlucky enough to get one, the regulars on here will advise on the best approach.

I do recommend that you post your SoA on here, formatted for MSE: Link

The regulars can then eyeball it and identify if there are any potentially any problematic lenders (such as credit unions), or add any other helpful observations.

RAS

@ChrisWLA Have you considered asking for write offs on health grounds? If your impulsive buying was triggered by medication and your ability to pay back hindered by injury, creditors might make a pragmatic decision to write off.

You need to get the Debt and Mental Health Evidence Form (DMHEF) completed by a doctor. Your GP is obliged to complete it without charge. Maybe also check if the team handling your epilepsy could do it?

ManyWays

Are you renting? private or social?