Token payments are a short-term debt remedy that can be used to help someone when they are struggling to repay their debts and cannot make their monthly payments.
Typically, token payments are payments of £1 or £5 per month and are paid to each creditor with their agreement.
Every creditor should receive the same amount and be treated equally.
Why will Creditors Accept Token Payments?
Creditors are usually prepared to accept token payments when they are sent an income and expenditure that shows only a small amount of disposable income; or no disposable income. However, where no disposable income is available, and a short-term solution is sought, a Moratorium should be considered first. This means you don’t pay anything.
The reason why Token Payments should only be considered as a temporary solution, is they normally won’t repay your debts in full. They are used when it is hoped someone’s situation may improve, so a more final solution like Sequestration (Bankruptcy) is not considered to be appropriate. If your situation does improve, you will be expected to increase the amount you pay each month.
It is best an offer of Token Payments is made through an advice agency, like a Citizen Advice Bureau or a Local Authority Money Advice Service, as it will reassure the Creditors that proper checks have been carried out and will also ensure best advice has been provided and another solution is not appropriate.
The argument your advice agency should make on your behalf is, as you don’t have much money, once you have paid your essential bills, you should be allowed to pay only a nominal sum. This small sum is not intended to repay the debt in full but is an acknowledgement that you owe the debt.
This serves several purposes.
Benefits of Token Payments
First, it lets the creditors know you are not trying to avoid your debts and accept you must pay them. Second, it prevents the debt being written by the operation of Prescription, as each payment, even a small payment, constitutes a relevant acknowledgment of the debt. Thirdly, it buys you time, which with the good will of your creditors will hopefully allow your situation to improve and hopefully you can then make a more meaningful offer.
Normally, when a Creditors accepts token payments they will do so only for a short period of time, after which they may agree to renew the agreement for another short period of time. This will usually only be after an updated financial statement has been provided by the money advice agency.
There are no limits to how often the agreement can be renewed and it is not unheard-of for token payment agreements to last for several years.
However, it is important to emphasise that Token Payments are not a long-term solution, as they won’t resolve your over-indebtedness, so it is important they do not last too long.
Interest, Charges and Fees
For Token Payments to be an effective short-term remedy, it is important to make sure the creditor agrees to freeze all interest charges and penalties whilst they are allowing you to make token payments.
The reason for this is because if interest, charges are fees are still applied to your debts, they will only grow and make your situation worse.
In addition to freezing all interest, charges and fees, it is important to also ask the creditors freeze all debt collection activities and legal action during the agreement period.
Regular Review of Token Payments Agreements
When a creditor who you are in a Token Payment agreement with requests a review, this should be done by the money advice agency.
They should draft a new income and expenditure and should also explain any mitigating circumstances and reasons why you are not able to pay your debts (for example, unemployment, illness etc.)
The advice agency should also consider, when they carry out the review, whether Token Payments are still the best option for you and discuss other options, such a Moratoriums, Write-offs and Sequestration.
How will Token Payments affect your Credit Rating
When you enter into a Token Payment agreement with your creditors, you will miss your monthly contractual payments with them.
This will impact on your credit rating and may affect your ability to obtain debt again in the future.