Token payment plans and other informal arrangements

What is an informal debt arrangement?

An informal debt arrangement is an agreement you make directly with a creditor, outside any court or insolvency procedure, to pay less for a while, make token payments or settle the debt for a lump sum, and GOV.UK lists (opens in a new tab) reaching an informal agreement with your creditors among the options for dealing with debt. It is the lightest of the debt solutions in England and Wales: nothing is filed and nothing goes on the Individual Insolvency Register.

Because it is informal, it holds only while the creditor keeps to it. A creditor can refuse an offer, and an arrangement with one creditor does nothing to stop another from chasing you.

Negotiating these terms for someone is debt adjusting (opens in a new tab), an activity regulated by the Financial Conduct Authority. Insolvency practitioners are excluded (opens in a new tab) only when acting as insolvency practitioners, or in reasonable contemplation of their own appointment, so we cannot negotiate token payments or settlements for you. You can do it yourself, or a free debt adviser can help.

What are token payments?

A token payment is a small payment, below the amount due, that a creditor may accept for a reasonable period while you cannot afford more after your priority bills and essential living costs. FCA rules list accepting token payments for a reasonable period of time (opens in a new tab) as one way a lender can treat a customer in difficulty with forbearance. Lenders may offer it, but nothing makes it automatic. The rule speaks of customers who show that meeting their existing debts would mean not being able to meet their priority debts or other essential living expenses.

A token payment shows the creditor you are dealing with the debt. It barely reduces the debt, and interest can keep building unless the lender agrees to stop it. The same FCA guidance gives suspending, reducing or waiving interest and charges as another example of forbearance, so it is worth asking for both at once.

• Work out what is left after your priority bills, such as rent or mortgage, council tax and energy.
• Write to each creditor with the amount you can offer, your income and spending, and how long you expect the situation to last.
• Ask the creditor to freeze interest and charges while the token payments run.
• Keep copies of every letter and record each payment.

What is a full and final settlement offer?

A full and final settlement is an offer of a lump sum, usually less than the full balance, to settle a debt. The creditor does not have to accept. If an FCA-regulated creditor accepts, it must confirm formally and unequivocally (opens in a new tab) that the payment settles your liability, so get that confirmation in writing before you pay.

A full and final settlement letter usually states the account number, the amount you can pay, that the payment is offered "in full and final settlement" of the account, and asks the creditor to confirm in writing that it accepts the payment as settlement of the account. Send nothing until that confirmation arrives. A settlement with one creditor does not change what you owe the others.

When is an informal arrangement not enough?

An informal arrangement is not enough when your creditors will not accept it, when token payments would never realistically clear what you owe, or when a creditor has started court action; a formal option such as an Individual Voluntary Arrangement, a debt relief order or bankruptcy then binds your creditors or ends the debts. An IVA, for example, binds every creditor (opens in a new tab) entitled to vote once it is approved, including those who voted against.

Formal options carry their own costs, rules and public records, and the right one depends on what you owe, your income and what you own. A free debt adviser can compare every option with you. James Kaye and Nick Morgan, our licensed insolvency practitioners, can advise on an IVA or bankruptcy; fees apply to an IVA.