How to get a three month break from your debt management plan or IVA due to coronavirus
IF your income has suddenly dropped due to the coronavirus crisis, you may struggle to make the payments on your debt management plan or IVA.
But there's help available so it's important not to bury your head in the sand.
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She said that the reader couldn't afford her monthly payments, as her partner had been put on furlough due to the pandemic.
But by convincing her to contact her DMP provider - Step Change - she managed to a get a repayment holiday.
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Sara told The Sun: "I know the DMP firms will be very sympathetic if your household income has dropped.
"DMPs are completely flexible and payment can be stopped then restarted - that's perfect for this situation.
"That reader was worried because she had had problems with her DMP in the past, but StepChange were very helpful.
"I expect IVA firms will also be helpful. They aren't as flexible as DMPs but the firms won't want an IVA to fail when a few months help could get someone back on track."
What help is there if you're in debt?
Debt Management Plan (DMP)
A DMP is an informal agreement so you can stop it at any time and resume the normal debt repayments, or adjust your payments if your circumstances change, like you lose your job.
It ends when you've paid off the debt so it could last for decades.
The plan is proposed to creditors individually so there's not guarantee that the interest will be frozen.
Many firms charge a fee for the service, either upfront or one that's incorporated into your monthly payments.
You can get a free DMP from StepChange and PayPlan.
The National Debtline doesn't directly offer DMPs, but told The Sun it'll refer Brits who need one to StepChange.
Individual Voluntary Agreement (IVA)
An IVA is a lesser form of bankruptcy, which is a legally binding agreement with your creditors to pay off your debts over a set period of time that has been approved by the courts.
It must be set up by a professional called an insolvency practicioner who will charge a fee of around £5,000.
Your repayments are made to the insolvency practioner who distributes your cash.
If you come into some money during your IVA then your creditors may have the right to claim it.
If you have any savings or pension payments then these will go to your creditor.
If you own a home you may have to remortgage it.
You may also struggle to get credit while repaying an IVA and details of the agreement will remain on your credit file for six years.
If you fail to make repayments then you could be made bankrupt.
The debts are written off after five years, regardless of whether you've paid them off in full.
Debt Relief Order (DRO)
A DRO is way to have your debts written off if you have under £20,000 of debt and no assests.
You have to pay a £90 fee but you don't have to make repayments and after 12 months your debts are written off.
You can't apply for a DRO if you're a homeowner. It will negatively affect your credit score for six years and it may be difficult to get credit during this time and details will be published publically.
Bankruptcy
Bankruptcy is a last resort if there is no other way to repay your debts. It lasts from one year to up to three and you'll be asked to make repayments during this time.
It is much more difficult to get credit after bankruptcy and your credit rating will be affected by up to six years.
You could lose your house, possessions and some professions won't let you work if you've been made bankrupt.
If you own a business it could be sold and the details of your bankruptcy will be published publically.
You have to pay a £680 fee to go bankrupt.
Below we explain how you can get a payment break if you're struggling financially.
How can I get a payment break?
Under new rules from the city watchdog that took force yesterday (April 14), if you have a personal loan, credit card, store card or catalogue credit, you can ask for a payment freeze or for lower repayments for three months.
With DMPs and IVAs, you usually have just the one debt repayment going to your DMP or IVA provider, and they then divvy up the cash to the individual lenders.
So in this instance, you should contact the IVA or DMP firm so they can liaise with lenders on your behalf.
DMP and IVA provider, StepChange, for example, says it's seen lenders offer up to three month repayment holidays as well as reduced payments.
But it says this will vary by lender.
Payday, short-term, buy now pay later, and car finance providers, for example, are not covered by the FCA's new guidance.
But they can suspend, reduce, waive or cancel further interest or charges on a case-by-case basis.
What happens after the three months is up?
If you are unable to restart repayments at the end of your payment holiday period, then the Financial Conduct Authority (FCA) says firms have to provide what is known as "forbearance".
This could include waiving the interest that has built up during the payment freeze period.
What do I need to watch out for?
A payment freeze doesn't mean these payments have been cancelled completely, and you'll likely still accrue interest on repayments during the repayment holiday.
This means you'll end up with a larger debt to repay, and your monthly repayments may go up after the freeze.
Will this affect my credit score?
DMPs aren't typically recorded on credit reports as separate entries, although many of the debts included will be.
IVAs, however, are kept on your credit report for six years from the day it starts, unless it is extended.
If you agree a payment holiday with your provider, your credit file won't be impacted for the period of the payment freeze.
That's because the three credit reference agencies - Equifax, Experian and TransUnion - have implemented “emergency payment freeze” measures.
These also apply to other measures such as reduced payments and paused payments, but not to increased credit limits or new borrowing.
But Experian warns that you shouldn't stop making payments without your lender's agreement as this could have a negative impact on your score.
John Webb, credit expert at Experian said: "If you have an IVA, stopping your payments could result in a lender taking the debt to court, which could impact your credit score and ability to borrow credit in the future.
"Again, with DMPs make sure you don’t stop paying or cancel direct debits without agreement from lenders first.
"Non-payment could result in further action by the lender, including recording further arrears, defaulting an account or taking the debt to court."
While Akansha Nath at Credit Karma UK added: "Approval for a repayment holiday needs to be given in writing, and this can take time.
"Borrowers should try to engage in a dialogue with their lender as soon as they’re concerned that they may miss a payment."
If you continue to need special forbearance measures after the three month hiatus, it may also affect your credit file and could lead to your lender freezing access to your credit.