Offer to Creditors - Important Information

Important Note

In order to simplify your Letter to Creditors, and to minimise the questions that your creditors may have, the amounts in the Letter to Creditors have been summarised as follows from your Statement of Affairs lines:

  • Car expenses = petrol + car insurance + roadtax + car maintenance + parking
  • Groceries = groceries + haircuts + entertainment + holidays + gifts
  • Buildings and Contents insurance = buildings insurance + contents insurance

Introduction

If you do not have enough money to make the minimum monthly payments on your unsecured debts but you are able to afford to pay something each month, then one option for you is to divide up the available money between your creditors pro rata (so the largest creditors are offered more). This 'Offer to Creditors' function produces a summary version of your SoA which you can send to your creditors with a letter saying that you are unable to afford to pay the full monthly amount and would like to offer them £x as shown on your enclosed Statement of Affairs. Also ask them to freeze interest and not add any charges to your account.

This procedure (offering pro rata payments and asking creditors to freeze interest) is known as a Debt Management Plan (DMP). DMPs are most suitable for people with temporary debt problems, for example if your income has dropped because you are on maternity leave or your partner has just lost their job but expects to find another one within a few months.

Warnings - is a DMP Suitable for You?

If you have a lot of unsecured debt (more than £20,000) then you should probably be looking at a more formal/reliable approach to resolving your debt situation, particularly if you are buying a house, where your unsecured creditors may well get fed up with a DMP after a year or so and try to get a County Court Judgement (CCJ) then a charge over your house. Here a DMP may be useful as a temporary measure whilst you make other arrangements.

You should calculate how many years it will take to complete your DMP. Take the total of your unsecured debt and divide it by 12 times the total offer to creditors. For example, if you owe £11,500 and you can afford to pay £180 a month, then it would take just over 5 years if all your creditors agree to freeze interest. If this time is more than 6 years, then you should probably be looking at alternative approaches to solving your debts, with a DMP only being a temporary solution.

It is not possible to make creditors freeze interest. Some will freeze interest initially and then later start adding interest again. If your creditors consider that your expenditures are unreasonably high, then they will refuse to freeze interest even at the start.

A DMP will wreck your credit rating. If you cannot afford to make the usual monthly minimum payments, then this is probably inevitable. However if you could afford the monthly minimums by reducing some of your expenditures, then you should consider this option seriously before opting for a DMP.

Practicalities

You should consider how sensible your expense items are over the period that the DMP would last - you may be happy not buying any clothes or having any entertainment budget for a year or so - but it is not realistic to suggest that you could do this for 5 years! There is no point in trying to set up a DMP on over-optimistic ideas of how much you will be able to reduce your expenditure.

Review any 'warning' messages on this Statement of Affairs calculator to check you have not missed any expenditures off. Look at the 'amount avaliable for debt repayments' line - does this figure seem right to you? If you think "I will never have £230 left to pay to by debts each month" then your SoA is missing something. You should consider keeping a detailed spending diary to see where the money is leaking away to.

You cannot make a reduced offer to just some of your unsecured creditors - it has to be to all of them. That way your creditors will see that you are treating them all fairly.

When you send the offers off, you should cancel your usual Direct Debit or Standing orders. Enclose a cheque with your offer. Your creditors will not agree to accept lower payments whilst you are continuing to make the full ones.

List the creditors in an easy to understand way on your SoA eg "HSBC credit card" rather than "cc 3". Also fill in the lines about how many adults and how many children are in your household. This will help your creditors to realise that your Groceries budget of £500 is not too high because you have 4 children!

If you owe money to the bank which is your usual current account, then you should open a new bank account with someone that you do not owe any money to and switch your income and Direct Debits to that account before you send off the Letter to Creditors. Otherwise your bank may decide to take all of your income and use it to reduce your credit card or loan with it, leaving you no money for the month.

If you don't want to write to your creditors yourself, then there are two not-for-profit organisations that can help you: CCCS and Payplan. You should beware of going to other companies that advertise their services as they will charge you a fee.