Notice of defaults: everything you need to know
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Find out how a Debt Management Plan would affect your credit history here.
A Debt Management Plan (DMP) is one way to deal with debt problems. If you’re struggling to repay what you owe, a DMP will combine your payments into a single, lower, monthly payment. By doing this, you’ll pay back everything you owe over a longer period of time – meaning you could pay back more in the long-run if you still have interest or fees to pay, but your monthly payments will be more affordable.
When you’re on a DMP, you’re taking back control of your finances so it can be confusing if you get a default notice from one of your creditors. Let’s take a look at the reason why your credit accounts could default while you’re on a DMP.
What is a default?
First off, let’s just quickly go through what a default on a debt is. When you miss payments on any credit agreements, creditors will send out a default notice. This means that creditor has now formally confirmed that the terms of your credit agreement have been broken and they can take other measures to get the money back from you. They can take legal action or pass the debt to a debt collector and they’ll usually issue you with a default before taking these steps.
You wouldn’t get a default if you just missed one payment. You’ll usually need to miss between three and six payments for the creditor to issue a default notice but this will depend on their individual policy.
A default will appear on your credit history for six years and it will affect your ability to borrow again during this time. That’s because each time you apply for credit, a lender will credit search you and they’ll see the default on your credit history. They’ll know that you didn’t keep to your original credit agreement and this might mean they’re less likely to lend to you. And even if they do accept you, they could offer you credit at a higher interest rate.
Defaults and Debt Management Plans
When you start a Debt Management Plan (DMP), your creditors can default your credit account. This is because you’re no longer keeping up with the monthly payment that you agreed to when you first took out the credit agreement.
People start DMPs because they want to sort their finances out, and get out of problem debt. That’s why it might be frustrating to think that you’ll end up with a default because of your DMP.
But if you’re in arrears with your credit accounts and you’ve missed payments, it’s likely there will already be some damage to your credit history. And if you’re focusing on clearing the debt you already have, it’s unlikely that you’ll be taking on any more credit any time soon.
Getting defaults while you’re on a DMP is definitely something to consider before you start the debt solution, but it’s important to keep it in perspective. After all, if you didn’t take any action to get back in control of your borrowing, your debts would start to build up, you’d have late and missed payment charges to pay and you could end up getting defaults anyway.
With a DMP, you’ll be working towards getting back on top of your borrowing and becoming debt free. The sooner you clear your debts, the sooner your credit history will start to improve and creditors will be more likely to begin lending to you again.
What are the alternatives?
A Debt Management Plan (DMP) isn’t the only way to deal with your unmanageable debts – there is a range of debt solutions available. Some of these will mean you can become debt free quicker, though they all come with their consequences as well. However, all debt solutions will have an effect on your credit history as you’re not repaying your debts in the way you originally agreed.
Speak to a debt advisor if you’re not sure which debt solution is best suited to you. You can get free support from the Money Advice Service if you’re looking for information related to any money questions. You can also get in touch with our debt advisors using any of the options to the left – they’ll be able to look into your situation and find the best way for you to start tackling your debts.
by Emily BancroftBack to blog home