What is an Informal Debt Solution?

What is the difference between a formal and informal debt solution? We’ve addressed some of the differences to help you decide whether an IVA or informal repayment plan is best for you.

Informal repayment plans are not legally binding debt solutions, which means they could offer the flexibility you need to regain control of your debts. However, for those who can not afford to repay their debts in full who are looking to write off some of their debts, a formal plan such as an IVA may be better suited. We’ve explained some of the key differences between a formal and informal debt solution to help you decide.

Debt solutions are categorised into formal and informal arrangements, with the main difference being that informal repayment plans, such as debt management plans, are not legally binding.

You can also usually alter the terms of the arrangement periodically to suit changing circumstances. This makes these informal solutions a lot more flexible than many alternatives.

The downside of these though is that they do not offer the same legal protection as formal agreements. This means, potentially, a creditor could still pursue legal action against you through the courts or with bailiffs. Lenders will usually agree to freeze interest and charges but they are under no obligation to do so. Nor are they obliged to reduce the amount you owe. Some formal debt solutions such as an IVA offer the protection from creditor action, freeze interest and charges, and the agreed terms of the IVA have to be stuck to by both you and your creditors.

Differences between an IVA and a debt management plan

Here is an overview of the key differences between the two debt solutions:

  • A Debt Management is an informal repayment plan, which allows flexibility for you and your creditors, which may help if your circumstances change;
  • Interest and charges and not guaranteed to be frozen on a debt management plan;
  • An IVA is an agreed, affordable monthly repayment which is proposed. If agreed with your creditors both you and your creditors must stick to the terms;
  • Interest and charges are frozen on an IVA;
  • You can usually write off any remaining unsecured debts upon completion of an IVA

You can find out whether an IVA would be a good solution for you by clicking get debt help and filling in the application form. One of our helpful advisors will be able to discuss whether an IVA would be right for you.

How does an informal repayment plan work?

Understanding the terms of an informal debt solution is key before entering into any repayment plan. You should select an option which is most favourable to you so your financial situation doesn’t deteriorate even further.

Generally though, you can either manage an informal solution directly, or go through a third-party. The latter option may be preferable as managing these plans can become very time-consuming if you have many creditors to deal with.

With informal repayment solutions, you’ll usually contact your lenders, explain your situation, and ask them to agree lower repayments to eventually repay the debt over an extended period of time in full. As mentioned though, creditors are under no obligation to accept.

How can I repay my debts informally?

There are a number of ways to repay your debt informally. One of them is called token payments. As the name suggests, you pay a lender a pre-agreed amount of money on a weekly basis. If there are multiple creditors, you get to pay tokens proportional to the amount of debt owed to each one.

For example, the creditor which owes the most debt ends up getting a larger token payment.

A Debt Management Plan is an informal debt solution. This involves paying a pre-determined amount to the lender monthly. Just like the token payments, you pay out more to the creditor you owe the most. This goes on until the full amount is paid in full.

For you to be eligible for a debt management plan, there are certain criteria which should be followed:

  • Minimum debt level is normally around £1,500;
  • You should not have less than two creditors;
  • You must be able to afford paying an amount to your debts each month.

You should also be aware that a debt management plan may have several detrimental effects. For example, details of the plan will be added to your credit file. However, a formal plan will also be registered on your credit file. This can make it more difficult to acquire credit in the future. For the duration of this informal solution, your assets are also not protected from creditors.

Can an informal repayment plan write off debt?

Although you can ask creditors to write off debt, they are under no obligation to do so and this decision will be down to the individual creditor. If you are unable to repay your debts in full you may wish to consider a formal solution such as an IVA instead.

Is this solution right for me?

Whether an informal repayment plan or an IVA is better for you depends on your financial circumstances. While we don’t offer informal repayment plans, Debt Support Centre can help you with an IVA which can help you regain control of your finances.

Get in touch today

We can help you decide on whether an IVA is right for you. Get in touch to find out more about how we will help our customers to write off an average of £10,500 of unsecured debt*.

*Average unsecured debt anticipated to be written off for IVAs approved between 1 January 2020 and 31 December 2020 is £10,568, based upon successful completion.

Reclaim your financial freedom

Get debt help To Debt Hub