Informal Arrangements

What are Informal Arrangements? 

An informal arrangement is an agreement with your creditors to repay your debt at a reduced amount. This may be because your are experiencing financial difficulties for various reasons. These types of arrangement are not court ordered but are still a form of agreement.

When are Informal Arrangements suitable?

Informal Arrangements are suitable for three categories of people:

Group 1. Those who have very little money to repay their debts.
Group 2. Those who are experiencing debt problems but are likely to be able to make the normal repayments again in a few months time.
Group 3. Those who are over-stretched and can afford a regular amount, say $50-$100 per month, but not the full contractual amount.

Therefore Informal Arrangements can be used to tide you over until your financial situation improves.

How does it work?

The first step to Informal Arrangements is to work out how much you can afford to pay your creditors each month after you have paid for essential living costs. An income and expenditure form should be drawn up to see how much money you have left at the end of every month (i.e. your surplus income).

This should then be offered to your creditors on a pro rata basis. This is calculated by doing the following:

Example:

Debt 1 $1,750
Debt 2 $2,400
Debt 3 $2,000

Total Debt $6,150

Total Surplus $95 per month

Payment to Debt 1

95 / 6,150 x 1750 = $27.03 per month

Payment to Debt 2

95 / 6,150 x 2400 = $37.07per month

Payment to Debt 3

95 / 6150 x 2000 = $30.89 per month

That gives you the total that should be paid to that creditor each month.

A letter should also be sent to each creditor explaining the situation and asking them to accept the lower payment until your situation improves and you can make the full repayments. Creditors may be more likely to accept your offer if you include the following when you write to them:

• A brief explanation as to how your financial difficulties arose.
• An indication of when your situation may improve.
• A copy of your income and expenditure form.
• A list of your other creditors including the payments you are offering to them. This shows that you have spread your surplus income fairly.

Some creditors may also agree to freeze any interest on your account, so it is worth asking.

Advantages of an Informal Arrangement

• The Arrangement can be drawn up by you or other independent advice agency quickly and for free.
• It provides an effective solution if your problem is short-term.
• It provides an effective solution if your debts arose because of a significant and long-lasting change of circumstances.

Disadvantages of an Informal Arrangement

• Your creditors are under no obligation to accept your offer of reduced payments.
• If they do accept, they can change their minds at any time.
• If they accept they are likely to do so only for a few months, unless your situation is unlikely to change.