What is a temporary payment arrangement?

9 September2011

Sometimes, life doesn't work out the way we expected. When something goes wrong - a drop in income, perhaps, a medical problem of some sort or even losing your job - the impact on your finances can be greater than you'd imagine.

In some cases, it can mean you simply can't keep up with all your financial commitments anymore. For the majority of us, this means things like mortgage or rent payments, utility bills and so on - and if you're carrying unsecured debts as well, things can be even more complicated.

First of all, it's important to realise that paying your lenders something every month is better than paying them nothing.

You might be surprised at how willing they are to help you, but remember you're not the only one in this kind of situation. It may be new to you, but your lenders will be quite used to discussing temporary payment arrangements with people who can't repay their debts as originally agreed and need some help for a while.

Before they can agree to anything, of course, they'll need to know where you stand financially. They'll need to know what you actually can afford to pay per month - which means you'll have to figure out exactly where your money should be going every month.

Once you've figured this out, you'll be able to prioritise your payments, which means figuring out which of your commitments are the most important.

Prioritising your payments

At the top of the list, the most important commitments are what we call 'priority debts' - things like:

  • Mortgage/Rent
  • Secured loans
  • Utilities (gas, electricity & water)
  • Child maintenance payments
  • Magistrates' Court fines
  • County Court Judgments (CCJs)
  • Council tax.

These are the payments that you really need to make. If you don't, the consequences could be particularly serious - you could end up losing your home if you don't pay your mortgage, for example, although your mortgage lender may be able to help you through some short-term difficulties.

They might give you a 'payment holiday', for instance, in which you'd pay nothing towards your mortgage at all. Just make sure you talk to them about all the consequences of doing this before you agree to anything.

Your 'non-priority debts' have to come second - things like:

  • Credit cards
  • Store cards
  • Catalogue debts
  • Overdrafts
  • Unsecured loans.

These debts are important, but the consequences of not repaying them as agreed are simply less serious. Unsecured lenders wouldn't be able to call in the bailiffs without getting permission from the court, for example.

Professional help: debt management plans & IVAs

In some cases, you may feel things are too complicated to deal with on your own. If you can't keep up with your payments and you don't like the idea of negotiating with multiple lenders yourself, you could consider a professional debt management plan.

A debt management company could help you with your finances, calculating how much you can afford to pay towards your unsecured debts each month and how that amount should be split among your lenders so it's as fair as possible.

They could also distribute those payments, so you just have to make one payment every month (to that company) and leave the rest to them.

But debt management isn't always the best approach. Some people may find an IVA (Individual Voluntary Arrangement) is more appropriate for them. It's kind of similar to a debt management plan, but is legally binding and can actually write off the portion of the debt that the individual can't repay in an agreed period (usually, but not always, five years).

Things to consider

If you don't repay a debt as originally agreed, this can damage your credit rating, whether or not you actually enter a debt management plan. And unless your lenders freeze interest, bear in mind that repaying debt more slowly means you'll be paying interest for longer, so it can cost you more in the long run.

If you enter an IVA, be aware that this is a form of insolvency and will have a serious effect on your credit rating - and that you might have to release equity from your property (if you're a homeowner) so you can pay your lenders more of what you owe them.

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Tags: debt, repayment, repayment plan, plan, debt management, debt management plan, IVA, credit rating, temporary payment arrangement, temporary, payment, arrangement

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