How to deal with a default notice

It can be hard to keep track of all your incomings and outgoings at times, which can cause you to miss payments. When you continually miss payments to creditors, however, you may face a default notice, which can harm your creditor rating and even cause debt collectors to come to your door.

In this guide we’ll explore default notices; what they are, the type of debts that might see you earn a default notice, and where you can get the debt advice you need to build up a positive payment history and get your finances back on track.

What is a default notice?

A default notice is a formal letter sent by creditors when you have missed a number of payments to them. It can also be called a notice of demand or a default letter.

The letter states that you have 14 days to repay the debt you owe before a default is added to your credit file. The default notice letter will advise what action you should take before your account has defaulted, in order to prevent any further action from being taken. It’s important not to ignore this.

Often a default notice is the first step taken by a creditor who is prepared to take further and often more serious action against you to reclaim that they’re owed.

If you fail to act and a default is placed in your credit file, it can stay there for six years.

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What happens when you receive a default notice?

A default notice is a formal letter that explains that you have broken the terms of your agreement with your creditor.

It should highlight:

  • Your contact details as well as the contact details of the company you owe money to
  • Details of your credit agreement and how it was broken
  • Steps you should take to resolve the matter and repay the arrears
  • Action your creditor will take if you fail to respond to the default notice
  • State the default notice has been served under section 87(1) of the Consumer Credit Act 1974.

What do people receive default notices for?

You could receive a default notice for account defaults (or missed payments) on most types of credit agreements, including:

  • Hire purchase agreements
  • Mobile phone contracts
  • Credit card payments
  • Arrears associated with your bank accounts

However, it’s important to be aware that if your agreement is regulated by the Consumer Credit Act (1974), your lender must have issued you with a default notice before they can take any further legal action against you.

It’s also important to note that you should only receive a default notice if you have missed between three and six months’ worth of payments.

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What action can a creditor take after sending a default notice?

This very much depends on how you handle the default notice. If you pay the default or follow the repayment terms within the requested time limit, no further action will be taken. However, if you fail to comply with the default notice the creditor will take steps to reclaim what is owed.

If you ignore the default the company you owe money to will put a stop on your using any more credit and close your account with them.

The creditor will escalate action to recover what is owed and can take actions, including:

  • Beginning court proceedings resulting in a County Court Judgement (CCJ).
  • Passing the debt to a debt collection agency.
  • Launching repossession proceedings for goods included in the agreement, such as a car purchased using finance.

A default notice is the first step on the road to more serious consequences, so it’s important not to ignore any letters that you receive and find expert advice as soon as possible.

What should you do when you receive a default notice?

You have 14 days to contact your creditor and arrange a payment plan from receiving the default letter. This is your opportunity to prevent a default from having a lasting impact on your credit score so it’s important not to ignore this and act fast.

Your first step should be to check the default notice carefully. Review the amount owed and the details of the missed payments alongside your personal details.

If this is in order you should contact the company you owe the money to in a bid to resolve the issue. The creditor will typically ask you to repay the full amount of payments you’ve missed but don’t let this put you off getting in touch.

What if you can’t afford to repay the money you owe?

It’s important to act fast when you receive a notice, to make sure you avoid more serious action like the default having a more long-lasting impact on your credit score.

If you can’t afford to repay the full amount of your debt, you can always ask the lender for the option to set up an affordable repayment plan. You might find the lender is willing to accept a portion of your debts rather than pursuing you for the total amount.

If the lender isn’t willing to negotiate, you should seek debt advice immediately. There are a number of debt solutions that can help, allowing you to repay your debt through a series of installments while writing off debts you can’t afford.

Many of these debt solutions are managed by an Insolvency Practitioner (IP) – a debt professional licensed by the Insolvency Practitioners Association, and often regulated by the Financial Conduct Authority (FCA). It’s the IP’s job to manage your repayment plan on your behalf, so you don’t have to.

How bad is a default notice?

Falling behind on repayments and receiving a default notice is never a good thing. However, the most important thing is that you act to resolve the situation before matters get more serious.

You shouldn’t ignore the notice and respond within 14 days to avoid the credit agreement being terminated. If this happens, the default will be registered on your credit file for six years.

The company you owe money can also demand you repay what you owe in full or begin court proceedings against you.

Debt collection and county court action

The debt could also be passed to a debt collection agency that will pursue the debt by chasing with letters, calls, and home visits until the debt is paid.

If your creditor begins court action against you, you could find yourself with a CCJ made against you which again has a negative impact on your credit file.

Creditors can also apply for a bankruptcy petition if you owe more than £5,000 so it’s important not to ignore the situation should you receive a notice of default.

Can you go to court over a default notice?

Yes, if you don’t respond within the 14-day window your creditor can take legal action against you. You’ll know if a creditor is taking starting legal proceedings as you’ll receive a letter of claim.

This letter will state:

  • The amount owed, including interest
  • A reply form to confirm you owe the debt
  • A standard financial statement
  • Details of your rights and guide to your next steps
  • Information sheet about organisations that can help if you’re experiencing financial difficulty

It’s important to respond to a letter of claim. If you don’t court proceedings will go ahead and the next communication you receive will be a claim pack directly from the court.

Again, it’s vital to respond to this because failure to do so will result in a CCJ being issued against you. This will knock up to 250 points off your credit score and stay on your credit report for six years.

Can I stop a default notice?

The best thing to do when dealing with a default notice is to get in touch with the creditor straight away.

If you fail to respond to the default notice within the 14-day window it can’t be removed from your credit file. Even when you repay the default, it will remain on your credit file for six years which can make obtaining credit more difficult in the future.

You can, however, as for the default to be removed if it was issued in error. If you’ve received the letter by mistake or you’ve already paid the debt owed, you can ask to have this removed.

Applying to have it removed

To apply for a default notice to be removed you should contact the company you owe money to with proof that it’s been issued incorrectly. You can do this by sharing bank statements showing payments being made.

A default notice can also be removed if you aren’t at least three to six months in arrears. If you receive a default notice after only missing one or two payments, you can ask for this to be removed.

If you believe that you have been treated unfairly or the creditor refuses to remove an unfair default from your account, you should contact the Financial Ombudsman explaining the situation and highlighting why it’s been issued unfairly.

The Financial Ombudsman can remove all traces of the default from your credit file if it’s deemed unfair.

You could also have a default revoked if you can prove you were sold unaffordable credit, such as a payday loan. The Consumer Credit Act states a form of credit must be deemed affordable to be viable for a client so if you’ve defaulted on an unaffordable form of credit there is the potential to have this removed.

How does a notice of default affect your credit rating?

A default notice can be applied to your credit file for six years if you don’t act. In the first 12 months of having a default on your file, your score could drop by as much as 350 points.

Any future lender is likely to contact a credit reference agency to run a credit check on you, and having a default on your credit file is a sign that you’ve not kept to the terms of a credit agreement.

Carrying default notices will mean lenders viewing you as a risk. This could result in paying a higher APR or in some case not even be approved for certain loans, mortgages or credit cards.

However, over time your credit score will increase as long as you take positive steps to manage your finances.

How can you deal with a default on your credit file?

While having a default on your credit file isn’t a positive thing, there are steps you can take to show that you are working towards improving your situation.

Repay any live default notices

Paying the default after it’s been issued won’t change the negative score on your credit file, but it does show that you’ve settled the debt and are less of a risk.

Add a notice of correction

This can be added to your credit file to give a little more detail about why you got yourself into the situation. This can be a good way of highlighting the default was a one-off if you only have one and circumstances such as redundancy could have been a contributing factor.

How can you improve your credit score after a default notice is shows up on your credit report?

The sad reality is, if you have a default on your file it will have a negative impact for six years. However, there are steps you can take to try and improve your credit score during this time.

Don’t apply for new credit

You should avoid applying for credit for at least six months to help give your score a boost and avoid getting into further debt.

Stay on top of payments to creditors

Ensure you don’t miss any other credit payments you owe. If you struggle try setting up a direct debit payment.

Register to vote

Registering to vote at your current address is an easy way to boost your score. The longer you’re on the electoral register, the better it looks.

Pay in cash rather than a credit agreement

Whenever possible you should pay upfront for products or services. For example, if you can it’s a good idea to pay your car insurance in one lump sum rather than monthly. This is viewed favourably and avoids the insurer carrying out an unnecessary search on your credit file and will be less likely to have a negative impact on your score.

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Where can I get debt advice and more information on dealing with a notice of default?

When you’re struggling to keep up with payments, things can get complicated. Maybe you’re hoping to get a mortgage one day and you’re worried about lenders contacting credit reference agencies and asking about black marks on your credit file.

Maybe you’ve fallen so far into arrears that you’re worried about a visit from debt collectors. Nobody deserves to live in fear – that’s where we can help.

IVA Plan specialise in free debt help, advice, and debt solutions that help you regain control of your finances. For free debt help from one of our friendly, understanding debt advisers, contact IVA Plan today.