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When people struggle with money, family or friends sometimes help. It’s common for parents to lend money to their children.
Can you keep repaying them if you start a debt management plan?
This type of debt will feel different to you. There are clear personal reasons to keep repaying them.
Debt advisers understand this. They also see these debts as part of a bigger picture. They want you to get out of debt, whoever money is owed to.
This scenario could look different to your other creditors. If you repay family but not them, they may view this as unfair.
Money owed to family or friends isn’t technically different. Your relatives or friends have no special status or rights in law. Repaying one creditor before another is known as a “preference”. If you “prefer” a certain creditor, other creditors might object.
A debt management payment gets based around a budget. Your bills and expenses get subtracted from your income. The amount left over is available to repay debt. This amount gets shared between your creditors.
Can you list a family debt as one of your expenses? There is no general rule against this. A debt plan provider may be prepared to allow this. You could keep repaying your friend or relative. You could repay the other debts via your DMP.
Will your other creditors accept this happening? There is no certain answer to this question. Each creditor will make their own decision. They understand all situations are different. They don’t set out to be unreasonable. However, they’d be entitled to consider this unfair. They could object to your debt plan on this basis.
Large payments to family/friends are more likely to result in an objection. Modest payments may be less of an issue.
Lenders do not have to accept debt management proposals. They are expected to treat you fairly. They are expected to accept a fair repayment offer. If they deem your repayment offer to be unfair, they could object. Large payments to family or a friend might get seen as unfair.
In this scenario creditors might continue to charge interest. They could issue a default notice. They might pass your account to a debt collection agency. A creditor retains the right to use legal debt recovery procedures. This is the worst-case scenario; creditors are often flexible.
Talk with those who lent you money. They’ve chosen to financially support you. Would they be prepared to put repayment on hold? Would they be prepared to reduce the repayments? This could provide a chance to clear your other debts.
In our experience, parents and friends are generally supportive. They’re often pleased to offer support. This could help you to regain control of your finances.
There are several ways to manage your debts. A debt management plan isn’t right for everyone.
It is not possible to “prefer” a debt in insolvency. You will receive no allowance to repay relatives or friends. Any surplus income is shared between all of your creditors. In some situations, family debt gets put at the bottom of the queue.
Be careful not to “prefer” a certain debt before entering insolvency. For example, this includes repaying a friend just before bankruptcy. This could result in serious consequences later.
Has a relative or friend acted as guarantor for your loan? For more information about guarantor loan debt, click here.
These debts are tricky in respect of debt management solutions.
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We’ve helped many people who owe money to relatives and friends. It’s often possible to find a solution that’s fair to all involved.
For confidential expert advice, please contact us.
Author: Andrew Graveson – Qualified Debt Adviser & Bright Oak’s Founder
Page Last Updated: 25/09/2019