When clients get in touch with our team, a common complaint is that they are overwhelmed by the sheer number of debt solutions available to them. It isn’t surprising; there are so many out there, and while some differ massively, others seem almost exactly the same.
One big difference to be aware of when considering debt solutions is whether they are formal or informal. What is the difference? Well, we’re about to tell you!
Keep in mind that we only include this blog for your convenience. If you need advice our team is always on-hand to answer any questions you might have, so don’t hesitate to give us a call and we can clear things up for you.
What is an informal debt solution?
An informal arrangement is an agreement between you and your creditors which is not legally-binding or made formal through an official contract. By using a debt counsellor (which we can provide) as a medium, a payment plan with your creditors can be arranged which, provided they grant and continue to give their support, can provide you significant relief.
An intermediary debt counsellor isn’t necessarily required to set up the arrangement, as it is technically just an agreement between you and your creditors with no middle-man involved, the expertise we can provide can be invaluable and will increase your chances of finding common ground.
Unlike formal agreements where as long as you meet your contracted repayments the terms will remain the same, informal agreements require the ongoing support of your creditors. They retain the right to pull out of the arrangement or change the terms at any time.
When is an informal debt solution useful?
An informal debt solution can be useful in many situations. Firstly, you might not be insolvent. It may just be the case that in order to pay off a debt in its entirety you require some breathing space. Explaining your situation to your creditors can give you some leeway in managing your finances; creditors might agree to give you more time, reduce your repayments, and may freeze any additional fees and interest on the debt.
They can also help when you have had an unexpected change in circumstances. If you have become unable to work due to injury or illness, have lost your job, or have had your income reduced for some other reason, then keeping on top of your prior commitments might prove to be difficult. Creditors can’t be accommodating of your situation if they aren’t aware of it, so taking steps to discuss your change in circumstances will allow them to reassess your current arrangement.
What are the advantages of an informal debt solution?
Every formal debt solution requires you to declare yourself as insolvent. This can have a negative effect on your credit rating, which can make managing your finances in the future more difficult. While it doesn’t spell the end (in fact if your credit rating is poor it can arguably have a positive effect) when you can avoid it you usually should. An informal agreement doesn’t require you to declare yourself as insolvent, meaning that you can preserve your credit rating and get on top of your finances.
Coming to an informal arrangement might also encourage your creditors to freeze the balance of your existing debt. Often, they will understand that you are taking steps to settle the debt and might make it easier for you by not adding any more fees or interest to the outstanding balance. This can save you a significant amount of money.
If your problems in terms of meeting your agreed repayments are short-term, perhaps an illness has reduced your ability to work only temporarily, then an informal agreement can be an incredibly effective method of steadying the ship until you are back on your feet. Creditors aren’t under any legal obligation to make things easier for you, but they will often understand your position and do what they can to ease some pressure.
What are the disadvantages of an informal debt solution?
None of the potential benefits of an informal solution are definite. Your creditors do not have to do anything to accommodate your circumstances. Even if they do, they can pull out of the new ‘deal’ at any time, and so are forced to rely on their continual, unofficial, support.
Because there is no formal legislated contract, you cannot be protected from creditor harassment. If those who you owe money to want to send you a letter demanding money, or phone your home, or take legal action against you, then they maintain this right. There is nothing legally stopping them from making contact or attempting to get money from you through court action.
Unlike a Trust Deed, Bankruptcy, or an IVA and so on, informal arrangements will not allow you to write off significant amounts of your debt. There is no fixed-term or legally backed payment plan whereby as long as you meet your predetermined obligations anything left at the end of your term will be wiped out. Outside of potential grace periods regarding additional fees, you will still have to pay back the full amount owed.
Is an informal solution right for me?
If your level of debt hasn’t become completely unmanageable, or if you have a temporary change in circumstances and don’t need large amounts of your debt to be written off, then a Debt Management Plan or Debt Arrangement scheme might be right for you.
However, why self-diagnose when there is free help available? We have a team of over 25 friendly and accommodating experts who are more than willing to go through your financial circumstances in close detail and develop a plan of action that is not only effective but completely personal to you.
Remember, talking to us comes entirely free of charge.
We listen. We advise. You decide.