Being in a debt plan – how will it affect me and my life?

If you’re wondering about this, don’t worry, you’re not alone. We get asked this question all the time.

At PayPlan, we’ve been providing practical debt help and advice for over 20 years, and we believe that you can – and should – be able to live a happy, worry-free life while you’re tackling your debts.

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Using our detailed knowledge of the wide range of debt solutions available – and our broad experience from helping more than 80,000 people every year – we’ve put together answers to some of the most frequently asked questions about what it’s really like being in a debt plan.

Lifestyle? Credit Rating? Home? Employment?

If you’re concerned about how a debt plan will affect your lifestyle, your credit rating, your home, or your employment, read on to find out more. And rest assured that all this information is backed up by real facts and feedback from real clients who’ve embarked on a debt plan after speaking to us.

Doing nothing is not an option

Whatever your concerns about entering a debt plan may be, the most important thing to know is that the biggest risks come from simply doing nothing to tackle your debts. And generally, the longer you leave it, the worse things will get.

By recognising there’s a problem – and taking action – you may be able to greatly reduce any negative impact on your life, both now and in the future.

Will my spending be restricted?

Yes, there’s no getting away from the fact that when you’re in a debt plan, you have to get used to living on a fairly tight budget.

But whichever debt solution you choose, your monthly repayments are set at a level you can realistically afford, after all your essential living costs and any priority payments (like your rent or mortgage) have been taken care of.

So yes, money may be tight – but at least you’ll have the peace of mind of knowing that you’ll be able to afford to run your home, buy food and clothes for your family, and keep on top of all your essential bills.

Will my credit rating be affected?**

If you’ve previously defaulted on any loan or credit repayments, these are likely to be recorded on your credit file – so the fact is that most clients already have a less than perfect credit rating when they come to us for help.

In itself, entering a debt plan won’t usually make your credit rating (or credit worthiness) any worse. And if you use the plan effectively to deal with your debts, you could even improve it over time as you sort out your finances. You can also improve your credit rating by maintaining payments to any credit-based bills – such as monthly instalments you may be paying for utilities, mobile phone contracts, and home and car insurance.

In an informal debt solution – like a Debt Management Plan (DMP) – the solution itself isn’t recorded on your credit file, but defaults can be registered by your creditors at any time. So you could have to wait up to 6 years after you’ve finally repaid your debts for all the defaults to disappear. Clearly, this can cause long delays in repairing your credit rating.

In a more formal debt solution – like an Individual Voluntary Arrangement (IVA) or Bankruptcy – this information is recorded on your credit file, but only for a set time of 6 years from the approval date of your arrangement. And creditors shouldn’t register any further defaults after a formal arrangement like this has been approved.

All defaults are normally erased from your credit file after 6 years – so as a general rule, the longer your debt solution lasts, the longer any defaults will show on your credit file.

Will I still get hassle from my creditors?

Whatever debt solution you choose, your creditors are much less likely to hassle you about your debts than if you do nothing. But even when you’re in your debt plan, they may still send you automatic default notices.

60% of DMP clients‡ say that all creditor contact stopped once their debt plan was set up. With more formal debt solutions like IVA and Bankruptcy, creditors are legally bound to stop chasing you for payment as soon as your arrangement is approved.

Will more interest and charges be added to my debt?

In an informal debt solution (like a DMP), creditors can choose to carry on adding further interest and charges to your debt. In reality, only 35% of DMP clients‡ say they have incurred additional interest and charges.

In more formal debt solutions (like IVA or Bankruptcy), interest and charges are frozen as soon as the arrangement is approved.

How long will it take before I am debt-free?

Some debt solutions (for example IVAs and Bankruptcy) only run for a fixed period of time, after which all your remaining debts are written off; with others (for example DMPs), you repay all your debts in full – normally over a longer period than was stipulated in your original credit or loan agreement.

In reality, 70% of IVA clients are debt free after 6 years, compared to only 15% of DMP clients‡, the majority of whose debt plans last considerably longer.

This maybe goes some way to explaining why 81% of IVA clients say they aren’t worried about their debts any more, whilst only 45% of DMP clients are worry-free.‡

Will there be any impact on my tenancy?

96% of PayPlan clients‡ say that entering a debt plan has had no effect whatsoever on their existing tenancy arrangement. Most landlords will be perfectly happy, as long as you keep up with your rent payments. And arguably, by opting for a debt plan – and setting aside money for all your essential bills – you’re less likely to default on your rent payments anyway!

Landlords can check your credit rating before offering you a new tenancy, although we know from recent research* that one in four landlords don’t bother with this.

Having a poor credit history may make it slightly more difficult to rent a new property – some landlords may simply request a larger deposit or ask for a guarantor.* But again, if they know you are dealing with your debts and sticking to a realistic budget, they could even have more confidence in taking you on as a tenant.

Will there be any impact on my home?

Your unsecured creditors can’t easily do anything to put your home at risk, as the debt isn’t actually secured on the property. However, if you consistently default on your repayments to an unsecured creditor, they could decide to take court action against you, and this could ultimately end up with a charge being placed on your home.

Being in an informal debt solution (like a DMP) doesn’t prevent your creditors from taking this type of action, but if you’re sticking to the arrangement, this should be much less likely than if you are doing nothing at all to deal with your debts.

If you’re in a more formal solution (like an IVA), your creditors can’t start any such legal action after your arrangement is approved, so you’re fully protected – as long as you make your agreed payments and stick to all the other terms and conditions of the arrangement.

However, in an IVA, if you have any spare equity in your property, you may have to try to release some of this equity to pay into your IVA towards the end of the arrangement. If you can’t release equity (for example via a re-mortgage), your IVA may be extended by a further 12 months instead.

In 2014, out of 2,000 IVA clients nearing the end of their arrangement, only 3 clients actually had to re-mortgage.† So it is much more likely that you will simply have to pay into your IVA as normal for another 12 months, before your arrangement is completed.

Will it affect my current job?

In very rare cases (mainly if you work in financial services or some other regulated sectors), having debt problems and/or entering a debt solution may be an issue. If you’re concerned about this, check your contract of employment or HR manual.

In reality, only 1% of our clients‡ say their existing job has been affected in any way by this – and in a recent survey*, the vast majority (93%) of employers said they wouldn’t treat existing employees with debt problems any differently.

From a personal point of view, if you’re struggling with ever-growing debt worries, it can be difficult to focus on your work – by taking steps to find a way out of debt, you should hopefully be able to concentrate much better on doing a good job.

Will it affect my future career?

If you’re planning to work in certain restricted or regulated sectors (like financial services) you might want to check whether your financial situation may affect your chances of following your chosen career path.

However, only one in ten employers* even ask applicants whether they have any current (or previous) debt problems, so in most business sectors this clearly isn’t an issue at all.

And unless the job you’re applying for specifically excludes applicants in a debt plan, maybe your willingness to take charge of your debts by entering a robust debt solution might even be seen as a plus point by some prospective employers?

Research Sources:

*The Impact of Debt: Views of HR Managers/Business Owners, Recruitment Agencies, Landlords & Letting Agencies (Independent research conducted by BDifferent Limited for PayPlan in June 2015)

‡PayPlan Customer Survey: The Views of PayPlan customers (Independent research conducted by BDifferent Limited for PayPlan in June 2015)

†Re-mortgage completion data provided by PayPlan Partnership Limited (June 2015)

**Credit Reference information confirmed by: Head of Consumer Affairs, Experian (2015)