In this guide, we’ll explain everything you need to know about defaults – including how long they’ll stay on your credit report, how to dispute a default, and what a lender’s next steps might be after a default notice.
What is a default?
Depending on the lender, a default notice may also be called a ‘notice of demand’ or simply a ‘default letter’ – but they all mean the same thing. It’s an official notice they have to send if they’re planning legal action against you.
Although a default notice is an important part of the debt collection process, it doesn’t mean that legal action is inevitable. The letter you get will explain how you can resolve the situation before it gets more serious.
Usually, avoiding an actual default simply means calling the lender and catching up with your missed payments – either with one payment or with a payment plan.
If you don’t catch up with the arrears (another term for missed payments) – the lender will register a default on the debt. The default will then stay on your credit history for 6 years.
Why do lenders have to send a default notice?
If your debt is regulated by the Consumer Credit Act (1974) – as many debts are – the law says that a lender must let you know each step of the debt collection process.
Before certain action is taken, the lender must let you know – giving you a chance to put the problem right before it hits your credit rating.
The default notice has to include certain pieces of information. They include:
- Details of the debt – including the name and address of the company you owe the money to
- Your details – including your name and address
- Details of how the credit agreement has been broken
- What your next steps should be if you want to avoid the default being registered
- What the creditor (the company you owe) will do if you do not follow the next steps on the notice
A default can be for any amount of money – but often include car loans or leases, personal loans, payday loans, mortgage payments, mobile phone contracts, catalogue debts or other credit accounts you may have.
Will I get a default for one missed payment?
No, you won’t get a default notice for just missing one payment – it usually requires that you’ve been missing payments for between three and six months.
What happens if I don’t respond to a default notice?
If you ignore a default notice, the company will start to take the action they’ve explained on the letter.
This can mean they:
- instruct a debt collector or debt collection agency to chase you for payment
- start proceedings to repossess the item that the finance agreement relates to (for example, a car, a piece of furniture or an appliance)
- start court proceedings against you – which would typically involve applying for a County Court Judgment (CCJ)
These kinds of actions will be logged with credit reference agencies and can have a big impact on your credit reports and credit score. Also, these are the kinds of actions that can have a big impact on your health too – often adding a considerable amount of stress to your day-to-day life.
What should you do if you get a default notice?
Since a default and the following legal action can be so damaging, it’s a good idea to deal with the default notice as quickly as possible. The longer you ignore the problem, the more likely you are to find yourself in legal troubles.
A lot of people assume this means paying the missed monthly repayments off completely – but this isn’t necessarily the case. Worrying about not being able to catch up with the debt completely shouldn’t put you off contacting the company involved.
Firstly make sure all the information on the default notice is correct.
Then, the next step should always be to make contact with the company or debt collection agency that you owe. They’ll ask you for payment – but they’ll understand that this isn’t always possible.
Don’t panic about being spoken to unkindly or feeling like you’re the only person they’ll deal with today who’s missed repayments. Chances are, you’ll be talking to a person who deals with defaulted debt all the time – and it’s their job to help you find a way to pay, not to judge your position.
Setting up a payment plan
Most of the time, people who fall behind by three or more payments will require a payment plan to get caught up.
The good news is, many lenders will have frozen your account at this stage – meaning there often won’t be additional interest added to your balance to make the situation harder.
The lender may talk to you about getting caught up with the payment and continuing your agreement as before when you’re up to date. Then again, they may look at a new agreement and a new affordable monthly repayment plan that will be in place going forward.
Lenders will sometimes need to see information about your incomings and outgoings at this stage. There are two reasons for this: Firstly, they’ll want to know you’re getting caught up as quickly as possible, but secondly, they’ll also want to make sure that your payments are realistic and not leaving you short elsewhere.
Will a default notice damage my credit rating?
The actual default notice letter you receive isn’t something that’s logged with a credit reference agency – but the missed payments will have been. Also, if the default progresses, then the default will be visible on any future credit check you have.
Since each credit referencing agency shares information with other agencies, this usually means all your credit scores will drop.
This is bad news if you’re planning on looking for further credit soon. This is because other lenders use current and previous credit data to decide as part of how they decide who to give credit agreements to.
However, a default isn’t the end of the world. You’ve got a couple of options when it comes to fixing the situation as quickly as possible.
Option 1. Pay off the default
Paying off the default amount won’t make the default disappear from your credit history – but it does show future lenders that you’ve caught up and dealt with the problem. This won’t change the damage to your credit score – but it’s looked on more favourably than having the debt outstanding.
Option 2. Add a ‘Notice of Correction’ to your credit file
You can add a notice of correction to any entry on your credit file. You’ll have to contact each individual credit reference agency to do so – but if you do, you’ll get the chance to explain the default.
You might decide to explain the circumstances that surrounded the trouble paying – just to give some context. This is often a good idea if you’ve had health issues, employment trouble or something else that was unavoidable.
As long as you don’t have lots of factors adding to your bad credit history, this will help lenders realise that the default is a one-off situation that’s unlikely to be repeated.
How long does a default affect your credit rating?
As previously mentioned, a default will show for six years before it is removed from your credit file. However, this doesn’t mean that it will have the same negative impact for the full six years.
Credit reference agencies are most interested in your recent credit utilisation. So, while they will still see a default that was registered 4-5 years ago, it will tend to influence them less than a default that’s been registered within the last year or two.
In the first 12 months since your default date, you may find some credit scores drop as much as 300-350 points. However, your score will improve as a few years pass.
Does my debt disappear when the default is removed?
Six years after an entry is made on your credit report, that same entry will disappear. This is true of everything from missed payments and CCJs through to satisfied debt solutions like Sequestration and Trust Deeds.
However, just because a piece of information on your credit report disappears after six years, that doesn’t mean the debt that it relates to also disappears.
There are complex laws and rules relating to debt – and one of those covers the length of time a lender can chase a debt for. For many debts, this is six years after the date that the last payment was made or you last admitted owning the money. After this point, some debts become ‘statute barred’ – which means that even though the debt still exists, there is no legal action possible to recover it. As such, most lenders consider this money to be lost.
Not all debt becomes statute barred after six years though. Some debts last much longer – and many will never be written off. Either way, it’s extremely unlikely that an unpaid debt will simply be forgotten about or written off simply because your default has gone from your credit file.
Can a default lead to being taken to court?
Quite simply – yes. If you ignore a default notice you’ll eventually get a ‘letter of claim’ from the creditor that you owe.
A letter of claim details how much you owe, any interest added, a reply form, a financial statement, and some helpful information about your rights and possible next steps you can take.
At this stage, there’s still a chance to come to an agreement with a lender – but if you ignore the letter of claim, court proceedings will go ahead without you. The next information you’ll get with come from a court, not a lender, and will include a ‘claim pack’ which gives you a chance to explain your side of the situation.
Again, fail to respond to this and you’ll be issued with a CCJ. This can knock your credit score down by another 250 points – and you may end up liable for court costs too.
Can I have a default removed from my credit file?
There are some circumstances that mean you can have a default removed from your credit report.
These include:
- If the default notice was sent to you by mistake
- If the default notice was issued and you were less than three months in arrears
- If you were not in arrears at all
- If you can prove the credit was given to you even though you could not afford it at the time
If one of these situations applies, then you should contact your lender to discuss what the next steps should be. If you are not happy with the answer they offer, you can write to the Financial Ombudsman explaining why you think the default was issued unfairly.
If the Financial Ombudsman agrees with your reasons, they can have the default removed completely.
Can a debt solution help to deal with a default?
If you act quickly, a debt solution like a Trust Deed can help you deal with a default.
Debt solutions like Trust Deed are managed on your behalf by an insolvency practitioner (IP) and the IP or their team will communicate with your creditors, debt collectors, and the courts on your behalf.
If your Trust Deed application is approved, any debt processes (including legal action) that you’re going through will be suspended while the IP negotiates a manageable monthly payment on your behalf. A debt solution won’t removed a default from your credit report – but it could help you get on top of problem debt and make it easier for you to create a better financial future.
