An Informal Moratorium is 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.
Unlike, with Token Payments, when an Informal Moratorium is requested, no offer of payments is made.
Moratoriums should not be confused with a Statutory Moratorium, which is a different thing.
When requesting a Moratorium from a creditor, it is important to request it from all of them.
Why will Creditors Accept a Moratorium?
Creditors are usually prepared to accept a Moratorium when they are sent an income and expenditure that shows someone has no disposable income from which they can make any payments towards their debts.
The reason why Informal Moratoriums should only be considered as a temporary solution, is they won’t repay your debt. 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 begin making payments to your debts.
It is best to request an Informal Moratorium 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 you have received best advice and no other solution is appropriate.
When requesting a Moratorium an advice agency should submit you don’t have any money left after you have paid your essential expenditure and you cannot afford to pay anything.
Moratoriums, however, serve several purposes for both you and those you owe money.
What are the Benefits of Moratoriums?
First, it lets the creditors know you are not trying to avoid your debts, and once your situation improves you will start making payments again. Second, it prevents the debt being written off by the operation of Prescription, as every time you request a Moratorium in writing, this constitutes a relevant acknowledgment of the debt. Thirdly, it buys you time, which with the good will of your creditors, will allow your situation to improve and hopefully you can then make a more meaningful offer.
Normally, when a Creditors accepts a Moratorium, 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 Moratorium to last for several years.
However, it is important to emphasise that Moratoriums 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 Informal Moratoriums to be an effective short-term remedy, it is important to make sure the creditor agrees to freeze all interest charges and penalties.
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 to freeze all debt collection activities and legal action during the agreement period.
Regular Reviews of Moratorium
When a creditor who has agreed to a Moratorium 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 review a Moratorium, whether it is still the best solution for you and discuss other options, such as Write-offs and Sequestration.
How will a Moratorium Affect you Credit Rating?
When a creditor grants you a Moratorium, you are effectively saying you cannot pay anything to your debts.
You can, therefore, expect your account will be marked as being in arrears, and you will receive a Notice of Arrears. This will likely be followed by a Default Notice, calling up the full debt you owe.
This will be noted in your credit reference file and will make it harder for you to obtain credit again in future.