How to get out of debt

The Token Payment Method is broken down into eight easy to follow steps. We appreciate this may be new to you, so make sure you read every step carefully, then read it again! This is going to be your new best friend.

Before we jump in, it’s important to explain that all of the information provided is based on section 7.3 of the FCA Handbook. Also note that the information provided below applies to debts regulated by the Consumer Credit Act 1974, that are unsecured and the creditor or collector is regulated by the Financial Conduct Authority.

Should anything change, we will update you as soon as we can. If you’d like to be notified directly of any changes when they happen, you’re welcome to join our mailing list.

Let’s not wait a moment longer and get started with step one...

Before you reach out to your creditors to talk about your financial difficulty, move your bank account away from your debts. What do we mean by this? It’s not as complicated as it sounds. It simply means, set up a bank account with a bank that you have absolutely no unsecured debts with. No loans, credit cards, store cards, overdrafts. Nothing. This bank account should be brand spanking new. It’s very important that you don’t set up or request for any credit facilities with this new bank. This new bank account is your fresh start.

Once your new bank account is up and running, there’s a little bit of work to be done; transferring all activity to your new account. First off, make sure all your income is paid into your new bank account. No more income should be paid into the bank account where you have debts.

Next, manually switch over any direct debits, standing orders or regular payments, such as your mobile phone contract payment, to your new bank account. It will take a bit of time but do not use the “switch bank” service. Use this as an opportunity to make yourself aware of what payments you have going in and coming out.

We want you to be in control every step of the way.

When it comes to contacting any creditors about your financial difficulties it’s critical you KEEP ALL CORRESPONDENCE IN WRITING.

Do not use phone calls to communicate with the creditors. If you can find an email address, great, if not, then get your pen out or jump on to your computer and write. You should be able to find the postal addresses of most, if not all creditors on any letters or statements they have sent you. If not, you will need to search for it on their website.

Now, you may find that you receive letters asking you to call the creditor, or letters that are clearly system generated. If this happens, look for the sender address on the letter you receive, and resend your original letter to this address. Repeat this process every time you receive correspondence that doesn’t answer your letter. Don’t panic if you haven’t received a response to your letter, it can take time for your email or letter to reach the correct department.

We’ll explain what to do if and when you receive a response in step five.

It’s really important that this bit makes sense so let’s break this down with an example.

The big message here is, do not miss any monthly payments!

Here’s why this is so important, we’re stepping into some technical wording here, so read it a few times to make sure you understand why…

Section 7.3.5 (3) of the Financial Conduct Authority (FCA) Handbook states the below as an example of treating a customer with forbearance:

Section 7.3.5 (3) accepting token payments for a reasonable period of time in order to allow a customer to recover from an unexpected income shock, from a customer who demonstrates that meeting the customer existing debts would mean not being able to meet the customer priority debts or other essential living expenses (such as in relation to a mortgage, rent, council tax, food bills and utility bills).

Creditors are expected to follow this guidance when a person makes them aware that they are experiencing financial difficulty and are making efforts to put a plan in place to address the situation with the creditor.

The action of making token payments, means the creditor should not pursue other legal routes, for example court, which could lead to a County Court Judgment (CCJ).

This is why the token payments are so important.

When you do eventually receive a response to your letter, the creditors might ask you to call to discuss your situation. Do not call. Simply write in your letters that you "wish to keep all communication in writing". By doing this, you’ll have a clear record of all discussions and agreements.

At some stage, you may receive a letter that includes an income and expenditure form. It is entirely up to you if you choose to complete this form or not however, we do suggest you complete this so your creditor can consider freezing the interest and other charges.

There is nothing in Section 7.3 of the FCA Handbook that states it is mandatory. The form is simply the creditor’s way of determining how much you can afford to pay them, so be mindful of this.

If you choose to complete the income and expenditure form, take a look at our budget planner. You can use this instead of the one provided by the creditor or debt collector. to help think through all of the detail and please read the next section carefully.

As I mentioned earlier the income and expenditure form is the creditor’s way of determining how much you can afford to pay them. If you choose to complete the income and expenditure form, here are some important pointers to be aware of:

• Only fill out the parts you are comfortable completing. If you are unsure about any of the requested information, do not feel pressured to complete that part of the form.
  
• The creditor is looking for the figure remaining after subtracting your expenditure from your income. This is the figure they will expect you to pay.
  
• Creditors are not allowed to suggest amounts for you to make as token payments. The income expenditure, shows them how much you can afford to pay each month.
  
• You are not required to send copies of wage slips, copies of bank statements, medical records or similar private sensitive information.
  
• Be aware that luxury expenditure may be questioned, things like expensive gym memberships, alcohol, cigarettes etc.

Once you have completed the income and expenditure, retain a copy for yourself and post the original to the creditor.

You should eventually receive a letter or email from the creditor confirming that your offer has been accepted for an agreed period, after which you will be contacted again for a review.

The creditor will get in touch to review your plan at least once within a 12 month period. However, this will vary, some may review your plan after a month, some after three months, some after six months. When you receive a letter requesting a review, do not feel pressured to increase your payment if you cannot afford to. If your circumstances haven’t improved, all you need to do is write back to the creditor telling them this. If you can afford to and want to increase your payments, then you can do so at any time.

Only pay what you can afford to, never sacrifice your mental wellbeing for the sake of increasing your debt payments.

We understand that although it’s just eight steps, there’s a lot of information in the Token Payment Method, with do’s and dont’s at every turn. We really don’t want the Token Payment Method to be daunting, we want you to feel calm and in control; ready to handle your unsecured debt at a pace you can manage.

You’re bound to have questions! We’ve highlighted some key questions you might have below…

To keep it short and sweet, there is no time limit. If you’re thinking that can’t be right, let’s go back to what the Token Payments are all about by visiting the FCA Handbook….

Token Payments are based on what you can afford. It’s as simple as that. If you are still experiencing financial difficulty, and you’re paying what you can afford, continue to pay the token payments. There is no time limit on how long a person can experience financial difficulty.

However, as a reminder, creditors and debt collectors are advised to contact you about your payment plan at least once in a 12-month period, to see if it is still affordable. You may also find that they send you another income and expenditure to complete.

If your circumstances haven’t improved, all you need to do is let the creditor or debt collector know, and state that you want to stay in the current plan. There is no timeframe for your financial situation to improve, so there is no timeframe for your plan to change.

It's important to be aware that your debt can still be sold at any time, even whilst you are making token payments. If your debt it sold, please make sure you read our “8 Steps to handle debt with a debt collector using the Token Payment Method" article and consider that you may need to restart this process with them.

This is one of the biggest benefits of the Token Payments Method!

If you follow the token payment method precisely, your assets will not be affected. Creditors and debt collectors must treat a customer (debtor) with forbearance, if a customer (debtor) provides evidence of financial difficulty and is openly communicating and making token payments.

We believe your unsecured debts should never come to voluntary bankruptcy or entering into agreements that put your assets at severe risk when you are actively making payments as agreed by the creditor in line with the steps we have outlined.

In short, you will see an impact to your credit rating. Though the impact won’t be to the same level as you would see if you enter into a DRO, an IVA or Bankruptcy for example. Now here is the detail:

If you’re following the Token Payment Method, this means you won’t be meeting the full payments, and technically you’re breaching the terms of your agreement.

So, what are the repercussions? The creditor will try and get you to rectify the breach by finding a solution for you to get back on track. They’ll do this by trying to get you to clear any arrears, or sometimes by changing the terms of the agreement, so that you are no longer in breach.

If they have no luck, after a while they will announce that the agreement has been broken. This is called a default. As you are making token payments you will eventually be defaulted even when there is a token payment agreement in place.

It’s worth to note though that once this agreement is in place you can expect nothing worse than a default. Why? Well, the FCA Handbook states that the creditor or debt collector needs to use forbearance i.e. in this case, to not pursue any normal legal routes they may usually be able to use in order recover the debt.

Ultimately, your credit rating will be affected by the default, and it will remain on your credit file for 6 years. However, the impact is much less than with a Debt Relief Order, Individual Voluntary Agreement, or Bankruptcy.

The information in this article is considered to be true and correct at the date of publication.