Lenders usually insist on being repaid, but in some circumstances, they may be prepared to write off some or all of your debts. There are a number of reasons that this could happen:
- if you are unable to repay your debts because you have no income or assets
- if you are unable to repay your debts because you are permanently unable to work due to an accident or illness
- If you have been declared insolvent
- if the debts are over six years old (five years old in Scotland)
If You Have No Income or Assets
If it is clear that you do not have sufficient income to repay your debts and don’t have any assets that you can sell to raise funds, there is no point in a lender spending time and money chasing you for repayments. If this is the case you may be able to speak to your lenders to see whether they can help you.
Your lenders will be more likely to compromise if you can show that you have made an attempt to manage your financial situation. As an example, if you can demonstrate that you have a viable debt management plan you stand a greater chance of your lenders working with you.
Your lenders may also be more inclined to listen to your proposal if you can show that you have taken action to reduce your outgoings. For instance, if you can show that you have sold your car to save money that will be taken into account.
If you can repay some of the debt upfront but will not be able to make any monthly repayments your lenders may agree to take a part repayment because a part repayment is better than no payment at all. This is called a full and final settlement figure.
It is important that you get any agreement in writing to avoid any misunderstandings. Otherwise you might think that by paying half of the outstanding amount you have settled the debt but the lender might still chase you for the other half.
If You Are Unable to Work Due to an Accident or Illness
If you cannot repay your debt because you are unable to work due to a serious injury or illness your lenders may agree to help you while you recover. They will usually require medical evidence that proves you are genuinely incapable of working.
Unless your injury or illness has resulted in you being permanently unable to work your lenders will probably not write your debts off but may agree not to chase you for repayments until you have recovered instead. They may also freeze the interest on the debts during your recovery.
If your injury or illness means that you will not be able to return to work it is quite possible that your lenders will agree to writing your debts off. You can improve your chances of getting them to agree to this if your incapacitation is due to a workplace injury and you are able to offer them a part-payment towards the debt in full and final settlement because you have received compensation as a result of injury.
Again, if you make an agreement with your lender is it important to get that agreement in writing to avoid any misunderstandings at a later date. If you are making a full and final settlement offer you want to make sure that the lenders cannot come back to you at a later date asking for the rest of the debt.
If your illness or injury means you are only temporarily incapacitated it is important to agree how frequently your incapacitation will be reviewed, and how the review will take place.
If You Have Been Declared Insolvent
There are a number of different types of insolvency:
How your debts are handled during the insolvency period differs but at the end of that period any remaining debt is written off. Usually a Debt Relief Order or Bankruptcy period lasts for one year whereas an IVA may last for five years.
Debts That Are Over Six Years Old (or Five Years Old in Scotland)
If a lender waits too long to take you to court the debt becomes unenforceable.
In Scotland the debt becomes extinguished at this point. This means that the debt is written off. In the rest of the UK the debt becomes statute barred and while this doesn’t actually mean that the debt is written off, the effect is the same. Once a debt has become statute barred the lender can no longer take you to court so the debt is unenforceable.
Debts become extinguished after five years in Scotland and statute barred after six years in the rest of the UK. The time starts running from when the lender could have taken you to court. However, the period starts running again if you acknowledge that the debt exists in writing or make a payment towards it.
As you get closer to the point where the debt is about to be extinguished or statute barred it is possible that the lender will make a full and final settlement offer that is lower than the outstanding debt in an attempt to cut their losses. However, they are not obliged to do this.
Note that even if a debt has been extinguished or statute barred some debt collectors will still attempt to get you to repay it. In fact, there are debt collectors that specialise in buying extinguished or statute barred debts cheaply on the basis that even if only a small percentage of borrowers make repayments they will still make a profit.
If you’re approached by such a debt collector bear in mind that it’s your choice as to whether you repay an extinguished or statue barred debt. Some people will feel a moral duty to repay these debts, but you shouldn’t allow yourself to be bullied into doing so, particularly if you cannot afford to repay the debt.
Your Credit History
It is important to note that even if your debts are written off, they will remain on your credit history for six years. This could make it difficult to open a bank account, get credit, take out a mobile phone contract, etc., during that period.