• Your creditors may be prepared, at the start or later, to agree to write off part of what you owe them. If they do so, they should confirm this agreement in writing.

• You should contact your creditors and negotiate an agreement to repay all or some of the debts. Negotiated agreements may involve either or both of these:

(1) payments from your income

(2) payments from lump sums you receive (for example from an inheritance or from relatives).

1. Payments From Your Income

• you need to work out how much you can afford to repay, after allowing for your essential household and personal spending such as mortgage or rent, heating, utilities, and housekeeping.

•  You should offer to share any extra income among all your creditors, based on the amounts you owe them. This means that all your creditors are offered their share of what you can afford. 

• You should also ask your creditors to freeze any interest or charges. 

• Your creditors will expect you to give them regular updates of your income and expenditure so that they can see whether you can increase your payments.

2. Payments From Lump Sums You Receive

• You may make payments towards your debts from a lump sum you receive and which your creditors may agree to accept in settlement of what you owe – that is, they agree to write off the balance they are owed.

•  However, if you do have extra income after paying your everyday expenses, they may expect you to make at least some payments from that as well. 

• If you can’t make payments temporarily, for example because of a short-term illness, creditors may agree to accept no payments or token payments of say £1 a month, but only usually for a limited period.

When you have money to share between your creditors, i.e. disposable income left over after essential bills are paid, you will need to make sure that each non priority creditor is offered the right and fair amount. 

Work out how much to offer 

1. Subtract the total amount of money going out each week or month from your total income. Whatever you have left (if anything) is known as your ‘disposable income’. 

If you have any disposable income,  you can work out how much to pay each non priority creditor. This is known as a 'pro-rata' offer of payment. To work out how much to offer each creditor, do the following. 

a) Find out how much you owe each non-priority creditor . 

b) Add all of your non-priority debts up to give you a total amount. 

c) Divide each individual debt by the total amount of non-priority debts. 

d) Multiply this figure by the amount of available income you have. 

Examples

Here is an example of how to work out a pro-rata offer 

You have worked out that you have £100.00 of disposable income each month. 

a) You find out that you owe £500 on a credit card, £1000 on a personal loan, £233 to a catalogue and £200 on a store card. 

b) You add all of these non-priority debts together to give you a total amount of £1933.

c) To work out the pro-rata offer you should make to the credit card company, divide £500 by £1933. 

d) Multiply this figure by 100 (because you have £100 disposable income pcm). 

This gives you a figure of £25.87. This means you should offer to pay the credit card company £25.87 a month. 

e) Repeat the calculation to find out how much you should offer to your other non priority creditors. 

The figures below show you all the calculations:

Credit Card £500 ÷ £1933 x £100 = £25.87

Personal loan £1000 ÷ £1933 x £100= £51.73 

Catalogue £233 ÷ £1933 x £100 = £12.05

Store card £200 ÷ £1933 x £100 = £10.35 

Total Debts £1933.00

Total Pro rata Payments £100 pcm 

Your pro rata payments should add up to the disposable income available.

• Fair and open way of sharing payments, widely understood by creditors.

• You can ask if you can reduce your payments if your situation gets worse or you face unexpected essential spending.

• You can negotiate these payments yourself, or Money Advice Hub can help with drawing up your personal budget sheet & make offers to your creditors based on this. You will need to make these payments each month.

• Creditors may be prepared to write off the balance of what you owe after a period of time if:

i) you have shown that you have made every effort to pay them back as much as you can, and

ii) you have maintained regular payments to them.

• You can still have a basic bank account when making an agreement with creditors.

• Creditors may refuse to agree with what you propose (but it’s always worth asking them to reconsider), although they can’t refuse to accept any payments you make to them.

• Creditors may refuse to freeze interest or charges (but it’s worth asking them to reconsider). If you can only afford small payments, they may not be enough even to cover interest or charges, & your debts will increase.

• Creditors may refuse your proposal unless it’s made through a debt advice agency regulated by the Financial Conduct Authority, which will have independently & professionally reviewed your circumstances. You can complain to the Financial Ombudsman if this happens.

• You remain liable to pay the full amount of your debts, although you may be able to persuade your creditors to agree to write off part, or even all of it, depending on your circumstances.

• Creditors could still take action against you, for example by getting a court judgment & then an order that creates a charge on your home, unless they have specifically agreed not to do so in return for the payments made under the informal arrangement.

• You are responsible for administering all the payments yourself & keeping creditors informed of your circumstances. If you have online banking, setting up & managing payments can be very simple.