There are many ways to tackle debt and in MABS we want to help you find the solution that suits you best. You may find after completing some of our 5 steps to tackling debt that you want to approach your creditors with an offer to repay your debts. This page will help you consider which voluntary arrangement approach to choose.
MABS can provide support and advice on this and every step on the way when you’re tackling debt. Or you can use the information we provide to help yourself and tackle your debts on your own.
What is a voluntary arrangement of your debt?
A voluntary arrangement is when you contact your creditors and negotiate to make an agreement to pay back your debt or debts over a period of time. It does not involve going to court and it is not legally binding unlike personal insolvency options.
There are many voluntary arrangement approaches and we present 4 here.
You need to reach voluntary arrangements with creditors if you:
- Don’t have enough money to take care of your priority debts like your mortgage
- Can’t meet your payments for secondary debts like a small credit union loan
- Are not suitable for formal insolvency debt solution
If you have just one difficult debt, contact the creditor and ask them if you can pay your debt over a longer time. They may agree to this.
If you are already in arrears, making a voluntary arrangement plan to pay your debts off with your creditors can solve the problem. You can contact MABS if you’re feeling overwhelmed.
Deciding which debts are priority and secondary
Before you choose a voluntary arrangement approach, we recommend using a system to help you set debt priorities. It’s very simple; start with urgent and priority debts.
With a priority debt, you usually have provided security such as your house that the creditor can take if the debt is not repaid. Learn more about dealing with priority and secondary debts.
Prioritising debts like this has been approved by members of the Banking and Payments Federation Ireland (BPFI) and is accepted by many other main creditors.
Tackling secondary debts
Many secondary creditors are signed up to an arrangement with MABS to deal with debt cases in a sympathetic and planned way. One such arrangement is between MABS and the BPFI. This arrangement is called the BPFI MABS protocol (pdf).
If you are following this approach on your own without asking MABS for help, the protocol can still apply as long as you do two things.
You must follow the principles of:
- Full and honest disclosure (providing evidence to support your offers)
- Fair treatment of all creditors.
Four types of voluntary arrangement
Below we describe 4 approaches for making voluntary arrangements to pay off your debts. Consider the pros and cons of each for your situation. Remember, creditors do not have to accept your offers and can choose to turn them down or make a counter offer.
1. The MABS approach
You first pay off priority debts, then make ‘fair share’ offers to any remaining creditors from available money. The secondary creditors who are owed the most will get paid the most.
What you need to do
This approach avoids the risk of priority creditors taking recovery action like starting legal proceedings. All secondary debts are cleared at the same time. Most creditors tend to accept this approach as it is fair. If a creditor takes legal action against you, you will have a strong defence. This approach works best if you can make your creditor agree to a suspension of interest. This means you don’t have to pay full or any interest on your debt.
If your repayment offers on your debt are low and interest is not reduced or stopped, it may take a long time to clear the debt.
2. The stress reduction approach
You first pay off the debt that is causing you the most stress. You pay other creditors minimum amounts (if you can afford it).
What you need to do
Deal with the debt which is the most behind in payment or causing you the most stress. Work out how quickly you could pay it off if you use all your leftover money to repay it each month. Pay minimum amounts due to all other creditors.
Sometimes even a relatively small debt can make you feel very stressed. It could make sense to pay it first to ease your stress. But only if you can afford to meet the minimum payments due to all other creditors.
You could fall behind with other debts, including priority debts. Creditors could take action which could make you feel stressed all over again. This approach may lead to paying more interest over time. With this approach, you prefer one creditor over the others. This could have an impact if you apply for a formal insolvency option later.
3. The ‘snowball’ approach
You start paying off the smallest debt first. You pay off other creditors the minimum amount (if you can afford it).
What you need to do
Pay minimum amounts due to all creditors except the smallest. Use leftover money each month to pay off the smallest debt first. When you’ve paid off the smallest debt, move to the second smallest and so on. Continue until you have paid off all your debt.
This can work if you have enough money to meet all minimum amounts due, and still have extra to pay off the lowest debt. Paying a debt off completely can make you feel good. This can keep you motivated and help you move onto the next debt on your list – ‘the snowball effect’. As each debt is cleared, more money becomes available to go towards the next debt.
You could fall behind on other debts, including priority debts. These creditors could then take action. This option may cost you more in interest over time. With this approach, you prefer one creditor over the others. This could have an impact if you apply for a formal insolvency option later.
4. The ‘debt stacking’ or ‘avalanche’ approach
You pay off the debt with the highest rate of interest. You pay off other creditors the minimum amount (if you can afford it).
What you need to do
Pay minimum amounts due to all creditors except the one charging the highest interest. Use leftover money each month to pay off the debt with the highest interest rate first. When you’ve paid off the first debt, move to the debt with the second-highest interest rate and continue until you have paid off all your debt.
By paying off the debts with highest interest first, you’ll pay less interest. Once you pay off the first debt, you have more money available to start paying off the next debt. This momentum builds until you’ve paid off all your debts – creating an ‘avalanche effect’. Less money is paid in interest charges.
You could fall behind on other debts, including priority debts. These creditors could take action which may cost more than the amount being saved in interest charges. With this approach, you prefer one creditor over the others. This could have an impact if you apply for a formal insolvency option later.
A note about voluntary arrangements and formal insolvency arrangements
How you choose to repay your debts, with or without an agreed voluntary arrangement with your creditors, could affect any application for a formal insolvency option you may make at a later date.
For example, you may not meet the rules for a Debt Relief Notice if in the last 2 years, you paid much more to one creditor than to the others. For other insolvency options, paying much more to one creditor than another can be grounds (reasons) for a creditor to object if it happened within 3 years of the application date for the insolvency.
Before you decide on an approach
Before you decide on an approach, you can learn more about:
Next steps if you want to self-help
If want to tackle your debts yourself by using voluntary arrangements and following the MABS approach, we suggest you:
- Read more about putting your plan into action in step 5.
- Use the MABS My First Financial picture tool to analyse your situation.
- Present your offer to your creditors using our sample letters.
Get more help from MABS
To enable us to offer you advice, before you have a consultation with one of our advisers, we suggest you:
- Make a list of all your questions
- Have your most recent letters, emails or court documents from your creditors to hand
- Have copies of any credit agreements (contracts) to hand
- Email one of our advisers your Full Financial Picture or Financial Statement
But even if you don’t have this information, you can still make the call and MABS will help.