In this article, we’ll explore the key aspects of Notices of Default, including their definition, typical appearance and content, legal implications, and their impact on your credit status.
We’ll provide you with practical tips and step-by-step guidance on how to respond if you receive one.
It’s important to deal with defaults and arrears, rather than ignoring them. Otherwise, the problem just gets bigger and more expensive.
What is a Notice of Default?
A Notice of Default, or Default Notice, is a formal communication issued by a creditor (lender) to a borrower when they fall significantly behind on their repayments.
It serves as a warning sign that the borrower’s loan or credit agreement is in jeopardy. The creditor sends this notice to legally inform the borrower of their breach of agreement and to provide an opportunity to rectify the situation.
Recognising a Notice of Default
Recognising a Notice of Default means that you can take appropriate action and address any potential issues promptly.
Although the appearance and specific details may vary, there are common characteristics to look out for when identifying a Default Notice:
A default notice should have the following text:
- ‘Important you should read this carefully’
- ‘Default notice served under section 87(1) Consumer Credit Act 1974’
Sender Information: The Notice of Default should clearly state the name and contact details of the creditor or lender who issued the notice.
Borrower Information: Your name and address as the borrower should be prominently displayed on the document.
Explanation of Breach: The notice will outline the specific breach of agreement that led to the issuance of the Notice of Default. It may include details such as missed payments, late payments, or other contractual violations.
Required Action: The notice will clearly state the actions you need to take to rectify the default situation. This may involve making a payment, contacting the lender, or seeking debt advice.
Remember, while the specific format and wording may vary, a Notice of Default is a formal communication that requires your attention.
How to Respond to a Notice of Default
Receiving a Default Notice can be unsettling, but there’s no need to panic. You will need to send a response, as ignoring it can lead to more severe and long-term consequences. Typically, you will have a minimum of 14 days to respond to the notice.
The first step is to carefully review the Notice of Default to ensure that all the information is accurate, including your personal details and the amount you are supposed to owe. If you spot any errors or discrepancies, you need to contact the creditor without delay to rectify the situation.
Assuming everything is correct, there are several paths you can take depending on your financial circumstances:
Pay the Required Amount
If you have the means to do so, paying off the required amount and meeting the demands outlined in the default notice will prevent your account from defaulting and shield you from further consequences. Your account will continue as usual, and you’ll need to continue making future payments according to the original agreement.
Negotiate a New Payment Plan
If you cannot repay the full amount but can manage partial payments, it’s always worthwhile to reach out to your lender and explore the possibility of establishing a new payment plan. By engaging in open communication and demonstrating your willingness to address the default, you may be able to work out a more affordable repayment arrangement.
Setup a Debt Management Plan
Struggling with debt is a challenging and stressful situation. If you find yourself in this position, it’s important to explore as many options as possible to regain control of your finances. One such option is a Debt Management Plan (DMP), which can provide relief by helping you manage all of your debts into one affordable monthly payment.
However, it’s important to note that if you ignore the notice or cannot repay the debt as requested, you will default on the loan.
Defaulting signifies that the lender believes you are unable to repay the loan entirely, leading them to cancel the credit agreement. In such cases, the lender may resort to further measures to recover the full amount owed.
These actions may include:
Debt Collection Agency
The lender can transfer your debt to a debt collection agency, who will then pursue the outstanding amount from you.
Legal Action
The lender may take you to court to seek a resolution. This could result in a County Court Judgment (CCJ) being issued against you, negatively impacting your credit rating and making future borrowing more challenging.
Repossession
In certain cases, such as hire purchase agreements or logbook loans, the lender may apply to the court to repossess your vehicle or other goods as collateral for the debt.
The Legal Aspects of a Notice of Default
A Notice of Default carries legal implications for both the borrower and the creditor.
It is the last step creditors must take before initiating legal action against a borrower. By providing the borrower with notice of their breach, the creditor adheres to legal requirements and gives the borrower an opportunity to address the default.
Can a default notice impact your credit score?
While the notice of default itself does not directly affect your credit file, it is important to understand that when an account defaults, it will be recorded on your credit history.
Once the marker for the missed payment or default is added to your credit file, credit reference agencies will update your credit score accordingly.
A default on your account indicates that you have not maintained the agreed-upon payments. If you apply for credit in the future, lenders are likely to see the default as an indication of a higher risk in terms of repayment reliability.
A default will appear on your credit file for six years, even if you manage to repay the debt in full during that time. This can create challenges when seeking credit cards, loans, mortgages, or even opening bank accounts. Lenders view defaults as red flags, which may hinder your future borrowing prospects.
In respect of mortgages, you may need to find a bad credit mortgage lender to help you. While there are plenty of these around, the rates will be dearer than a standard mortgage.
However, after six years, the default will be removed from your credit file, even if you haven’t finished paying it off.
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What Happens If a Notice of Default is Ignored?
Ignoring a Notice of Default can have severe consequences.
Failure to address the default may lead to legal action, where the creditor can pursue debt recovery through the court system.
Additionally, the creditor may transfer the debt to a collection agency or obtain a County Court Judgment (CCJ) against you.
Do I have a CCJ? How do I find out?
Ignoring a Notice of Default will not make the problem go away; it may only exacerbate the situation.
Getting Help and Advice
If you are struggling with repayments or have received a Notice of Default, seeking help and advice is vital.
There are several free and impartial debt help services available to support you in managing your financial difficulties. Consider reaching out to organisations like StepChange, Citizens Advice, or the Money Advice Service, which can provide guidance tailored to your specific needs.
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