Step 4: Negotiate with your creditors
If you have identified your priority debts and created a financial statement you should now be ready to make a deal with your non-priority creditors.
Some organisations can help you negotiate with creditors. Remember, you should arrange to repay your priority debts before making any offers to non-priority creditors.
You will need to write to your creditors at each stage of the process. You can download these sample letters [Doc, 39Kb] and adjust them to fit your circumstances. At the top of each sample letter, you will see instructions about when and how to use it.
If you have any disposable income based on the financial statement you completed (disposable income is income minus expenditure), you can start to follow the procedures below:
1. Send holding letters to all non-priority creditors (see letter sample 1 [Doc, 28Kb]).
2. Work out pro rata payments to creditors based on the disposable income you have. Pro rata means an amount that is in proportion to the debt you have with each individual creditor. This is how you would calculate a pro rata offer to your creditors:
Individual debt x total disposable income ÷ total debt = payment arrangement for each creditor.
Disposable income should have been worked out on either a weekly or monthly basis, and offers should be made on the same basis.
The following is an example of how pro rata offers would work.
Calculating a pro rata payment
In total, Linda’s non-priority debts from credit cards and unsecured loans add up to £20,000.
After she has paid her essential living expenses, her mortgage and outstanding taxes (priority debts), Linda has £100 a month left over. She wants to divide this up fairly to pay off at least some of the debt owed to her non-priority creditors.
Here is how Linda worked out a fair payment offer for a loan for which she still owes £3,500:
£3,500 owed to an individual creditor x £100 disposable income per month ÷ £20,000 total debt = £17.50 per month payment offer
When she writes to the bank about her loan, Linda can include a copy of her financial statement and explain how she worked out the pro rata payment offer (see below).
3. Send offer letters (see sample letter 2 [Doc, 24Kb]) with pro rata offers to non-priority creditors.
Include a copy of your financial statement with each offer letter, as this will demonstrate to creditors how you reached the offer figure. Start making any payment offer you’ve made and don’t wait until they reply. There are agencies like StepChange Debt Charity or National Debtline that will help you do this for free, so that all the money you can afford goes to your creditors and not in fees.
Your financial statement will also show that you have no further disposable income available. You may find that once you have completed your financial statement, you have no disposable income to offer your non-priority creditors. The next course of action would depend on your individual circumstances. You’ll need to assess when you or family members are likely to return to work and regain control of your finances. This will depend on any treatment that you’re likely to have and how long it will last for.
You should contact your creditors and make them aware that you have no disposable income, and ask that they withhold any further action on your account for three to six months (see sample letter 3 [Doc, 25Kb]). You'll also need to request that your creditors do not add any further interest or charges to your account during this period.
Not all creditors will accept this and they may press you for an offer of payment. In this case, write back to them. Explain that you’re treating all non-priority creditors the same and can’t offer them more than another. Tell them about other creditors who have already accepted this arrangement.
If you have terminal cancer and treatment isn’t an option, you may be able to discuss this with your creditors. At this stage, it may be a good idea to suggest to your creditors that they write the debt off immediately, as the possibility of your future earnings may be limited (see sample letter 4 [Doc, 25Kb]). Your creditors may never formally agree to write off a debt, but they may decide to take no further action.
Other debt strategies
If you’re unable to repay your debts in a reasonable amount of time, a repayment programme may not be appropriate. If this is the case, you should seek specialist advice from a free debt advice agency such as National Debtline, Payplan and StepChange Debt Charity. Their advisers may suggest that you consider bankruptcy, a Debt Relief Order or an Individual Voluntary Arrangement (IVA) – an agreement between you and your creditors to pay all or part of your debts. These must be set up by an authorised debt specialist and there are costs involved. You can get advice about IVAs from your nearest Citizens Advice or StepChange Debt Charity.
Debts you leave behind
Everything you leave when you die is called your estate. This is the value of everything you own minus everything you owe. Whatever remains goes to your beneficiaries.
If you have debts, they reduce the size of your estate, so your beneficiaries receive less. If your debts amount to more than the value of everything you own, there will be nothing left for your beneficiaries, but these debts are cancelled and your beneficiaries won’t have to pay them.
There are some exceptions to the situation described above:
Student loans These are automatically cancelled on death and do not reduce the size of your estate.
Borrowing covered by life insurance If a loan is secured against your home, the home would normally be sold to raise the money to repay the loan. But if you had taken out life insurance along with the loan, the life policy will pay it off instead without any sale of the home. Similarly, if you had taken out life insurance with any other loan, the loan will be automatically repaid.
Joint borrowing If you took out a loan jointly with someone else, you’re both responsible for the whole loan. So, in the event of your death, your joint borrower must take over making the full repayments (unless life cover has repaid the loan as described above).
Our section Sorting out an estate has more information.