One of the main issues when you start tackling problem debts is understanding the official terms used by banks and creditors. Your options, and the impact on your financial status, change massively as you go from missing the occasional payment to risking court action. That’s why it’s important that you know what it means to have a default, or a CCJ. And how to go about fixing the situation.
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Having a clear understanding of your problems will make it easier to choose the right debt solution. And helps you share the right information with debt advisors or support organisations when you need advice.
Two of the main terms you’ll often hear used in relation to debts will be defaults and CCJs. Find out what impact defaults and CCJs have on your credit score. Is it better for your credit rating to find alternative debt solutions? Or can you write off some of your debt without any further damage to your financial records?
The impact of a default or CCJ will also be a big burden on your ability to borrow any money, or access finance for a car or mortgage. It’s important to know how long the effect will last, so you can plan around the financial consequences and plan for the future.
What is a default?
A default is the official term used when you fail to keep to a repayment agreement. It can happen if you miss just one payment, although this is typically very unusual. To start defaulting, you’ll usually have missed somewhere between three and six payments without sorting an alternative solution with your creditors.
When you start missing multiple payments, you’ll be sent a default notice, which is a formal letter stating how much you currently owe. It will also give you some time, usually two weeks, to make a payment and get back on track. However, this will often be a request for the full amount owed.
If the situation isn’t resolved in the time allowed by the default notice, your account will go into default. This will be recorded on your credit record, affecting any future borrowing. And your creditors will now look to get their money back through further options, including CCJs.
Missing payments will have a noticeable negative impact on your credit rating, but you can repair the damage fairly quickly. Defaulting on an account actually carries the biggest penalty for your credit score, even more than a CCJ.
How long does a default stay on your credit file?
When a default is recorded on your credit file, it will be visible for six years. This will be visible to anyone checking your credit information, including if you apply for a credit card, loan or mortgage. Most employers won’t look at this information, unless you’re working in the financial services industry.
A default will remain on your records, even if you pay it off over time. So, it can be more sensible to look at debt solutions which write off part of your debt, rather than trying to repay the full amount, as it makes no difference to the impact on your credit score. The only benefit is if you really need to get credit during the time a default is on your credit file, as lenders will see a settled default as less of a problem.
Once your default is removed after six years, it can’t be re-registered by your creditor, even if you still owe money on it. And if your lender sells your debt to a collection agency, then this should be made obvious on your credit report, so you don’t end up with the same default appearing twice. If this happens, the date and amount shouldn’t change either – so you won’t have to pay more or wait longer for the default to be removed.
The impact on your credit score from a default will go down over time if you keep meeting your other financial commitments. So, if your default was five years ago, you’ll have access to more offers at better rates than if it occurred in the last six months.
When the default disappears automatically from your credit file, this doesn’t mean that you stop owing money to your creditors. This will depend entirely on the debt solution you’ve chosen. But it does mean future lenders won’t see any reference to your previous debt, and your credit score will improve.
How bad is a default for your credit score?
The impact of defaulting really depends on the action you take. When you receive a default notice, the best option is to contact your lender, and make them aware of your financial difficulties. It’s especially important if your debt problems are due to a temporary situation, as many companies will let you take a payment holiday for one or two months if you explain what’s happening.
You can also slow down further action by contacting creditors to let them know you’re in the process of setting up a debt solution. And our Debt Buffer letter templates can help you communicate that in an effective way.
Options include speaking directly to your creditors and offering to pay off your debt in more affordable instalments. But if you’re not confident about organising this yourself, or you’re feeling stressed and pressured, then a debt support organisation can do this on your behalf.
Each of the three main credit references agencies in Britain use slightly different scoring systems. But as an example, a missed payment will cost you around 130 points from your Experian credit score, but a default will lose you around 350 points when it’s first issued. And even after four years, it will still be around 200 negative points.
That contrasts with using more than 90% of your credit limit (-50 points) or having more than £15,000 in debt on a credit card (also -50 points).
These figures are guidelines, and will vary depending on your individual circumstances, but it means defaulting on an account will be the biggest single drop on your credit score.
Is it worth paying off a default?
If you have reached the point of defaulting, then you may question whether it’s worth paying anything off your debt. After all, it’s going to be on your credit file for six years whatever happens.
If you don’t do anything, then your debt problem is likely to escalate to a CCJ. And although the default will be removed from your credit score, the debt itself will still be owed until it’s settled or written off. And a CCJ would then be added to your file for a further six years.
So, the best option is to take action, usually by entering into an agreement or debt solution with your creditors. The right choice will depend on your plans and circumstances, but includes everything from a voluntary debt management plan to an individual voluntary arrangement or bankruptcy.
It’s also worth noting that if you enter into a debt solution with lower monthly payments, this may result in a default being issued against you as you’re not paying the full required amount. This will have the same effect on your credit score, but isn’t a reason to worry, as your creditors have already agreed to the arrangement in place. So, it’s more of a formality, although you should still check with your DMP or IVA provider if you receive a default notice.
Some of the options will mean you pay back the full amount owed over time, such as a debt management plan (DMP). There are benefits to this route, including flexibility, and creditors will agree to stop charges and interest from being added if you make affordable monthly payments to clear the owed amount.
A voluntary DMP arrangement isn’t recorded as a separate entry on your credit report, and a flag will be added to your account entries, to indicate you’re making agreed lower repayments. This will usually also lower your credit score, but only as you’re paying a smaller amount.
But it’s also worth considering options including an Individual Voluntary Arrangement (IVA), which is a legal agreement with stricter controls over your budget during the agreed term. The benefit is that any debts outstanding at the end of your IVA will be written off, meaning you won’t have to clear the entire amount.
Entering into an IVA will negatively affect your credit score by around 250 points (using Experian as an example and depending on negative circumstances). It will be recorded on your credit file for six years from the start date, and you will also be listed on the public Individual Insolvency Register until three months after your IVA has ended.
An IVA also has arrangement fees which you’ll usually pay back as part of your repayments. And you can’t borrow more than £500 in further credit without getting permission from an Insolvency Practitioner who will manage your IVA.
Another option is bankruptcy or a debt relief order (if you’re eligible), which allows you to make a fresh start after a year. But you may be required to sell your home or other assets, including any businesses you own. It’s also public information, and you could have a bankruptcy restriction order made against you, which can last up to 15 years.
Ultimately, you need to take action, and pay something towards your defaults to avoid your problem debts getting worse. But many solutions will let you write off potentially large amounts of your current debts, or at least stop the amounts increasing whilst minimising the chance of court action in the future.
Fixing default mistakes on your credit record
If you are managing debt problems then it’s important to check the details held by the three main credit reference agencies in the UK (Experian, Equifax and TransUnion).
It’s unusual to be able to remove a default from your credit record before the automatic six year expiry date. But there are some issues and mistakes which can mean it might impact you for even longer. Especially if you don’t even know they’ve happened on your credit report.
The first step is to check your credit report. A default should be added when you are 3-6 months in arrears. If it’s added to your credit record much later, then it’s worth getting it corrected so it will be removed sooner. A similar issue can occur when your debts are passed to a collection agency, as they should use the same date as the original lender if they add a new record.
If you have an issue with the original debt or communication from your lender, then it may be possible to have the default removed. This includes if you have an affordability complaint about a lender not conducting a proper check whether you can afford repayments before giving you money. It could also result from a creditor not explaining what the debt was, or the full details of the amount, or if they continued writing to an old address if you’ve notified them about a change.
For corrections, you’ll need to contact the credit reference agencies to explain how and why the default details should be changed. They’ll contact the lender and also add a ‘Notice of Correction’ to your credit report. If a change is agreed, your report will be updated. If not, then you’ll need to look at other options, including contacting the appropriate Ombudsman or the Information Commissioners Office.
For affordability complaints or other issues with the debt itself, then you’ll need to start by contacting the lender. And then escalating the issue to the relevant Ombudsman if the issue remains unresolved.
What is a CCJ?
A County Court Judgement (CCJ) is a court order in England and Wales for lenders to recover money towards your debts. It’s not a criminal offence, so you can’t be sent to prison as a result. But failure to meet the payments can result in bailiffs coming to your home or business, or the money being deducted from your wages instead.
The process begins when you receive a “letter of claim” with details of the debt. At this point you should stay calm, as you have 30 days to respond. But it’s important to take action to avoid a CCJ. This includes making an offer of payment if you can’t afford to pay the amount in full, letting the creditor know you’re seeking debt advice, and requesting more information about the debt if you need it.
If you can reach an agreement with your creditor at this stage, then court action can be avoided. If not, you’ll then receive a county Court claim form. This is part of a claim pack, which also includes three further forms.
- N1 – Claim form
- N9 – Response pack
- N9A – Admission (specified amount)
- N9B – Defence and counterclaim
You now have 14 days to respond by post or online. Or to apply for an extension if you have a reason for not being able to meet the deadline.
The N9 form allows you to supply information on your income, living costs, other debts, and an offer of payment instalments from you, which should be sent to your creditor (not the court). If they accept your offer, the court will be asked to set the CCJ payments at that rate. If they don’t accept, then the information will be passed to a court officer or District Judge who will decide the rate of payments.
A CCJ will stay on your credit profile for six years, and you will also be added to the public Register of Judgements, Orders and Fines unless you either pay the full amount within one calendar month of the CCJ being issued. Or you dispute the CCJ and prove it was issued in error.
Once a CCJ has been issued against you, the associated debt can still be included in an IVA. If this is agreed by your creditors, it will supersede the previous CCJ and become legally binding, so your repayments will be directed to your IVA, including those for your Country Court Judgement. This also overturns an earnings attachment if the CCJ was enforced by a dedication from your wages.
The exception to if you are a full or part homeowner, and a creditor has also applied for a Charging Order which secures the debt against your property equity.
How does a CCJ affect your credit rating?
A County Court Judgement will stay on your credit report for six years, even if you’re able to pay it off earlier. This will obviously have a big effect on your score, and the ability for you to get finance during that period.
You may be surprised that the credit score points lost by a CCJ (-250 points) are actually slightly less than those from receiving a default (-350 points) on your account. But this will be in addition to the default you’ll probably already have.
Lenders also conduct their own assessments beyond looking purely at your credit score. And a CCJ will be seen as more serious than a default. So, you’re likely to struggle with any borrowing during the six-year period, and also while you rebuild your credit rating after the CCJ has been cleared.
What happens if you don’t pay a CCJ?
If you’re legitimately unable to pay the amount required by a CCJ, you need to contact the court. The options are to either change the amount by making an “Application to Vary an Order” using form N245, and paying a £40 fee. Or if you can’t pay anything, you can complete an “Application Notice” using form N244, and pay an £80 fee to try and have the judgement set aside and ended.
To have the judgement set aside, you’ll need to attend a court hearing to discuss the situation. And obviously the request will need to be supported by some reasonable evidence for why you’re unable to pay.
Just failing to make payments entirely can lead to further enforcement. The court may issue Bailiffs to come to your home or business and recover payments or assets against your debts. It can also set an Attachment of Earnings Order to deduct money directly from your wages.
If you own or pay a mortgage on a property, it will be safe while you meet your CCJ commitments. But if you don’t pay, the court can issue a Charging Order. This turns your unsecured debt (credit cards, personal loans etc) into a secured debt which then allows the court to force the sale of your property to pay back your creditors.
As always, the worst thing you can do is nothing. There are multiple stages in the process before a CCJ is issued to either avoid court action or ensure that payments are as affordable as possible. And even after you’re in a CCJ, you can still apply to reduce or set aside the repayments if your situation is unworkable.
Can a CCJ be removed?
There are two ways in which you can have a CCJ removed prior to the six-year time limit. And this will apply to your credit report, and the Register of Judgements, Orders and Fines.
The first method is if you can pay the CCJ in full within a month of your judgement. For instance, if a friend or family member decides to help you, or you can sell a valuable asset. To do this you’ll need to apply for a ‘certificate of cancellation’ from the County Court which issued the CCJ, by providing them with proof of your payment, and paying a £15 court fee.
One month after the CCJ has been issued, paying in full won’t remove the CCJ from your records. Instead it can be marked as ‘satisfied’, or paid off, which will help with applying for credit. But it will still be on your credit report and the public register.
The other way to remove a CCJ is if you have a good reason for the court order to be cancelled or ‘set aside’. This could happen if the claim form was sent to an old address, you replied on time but the creditor ignored it, or the amount being required to pay has been worked out incorrectly.
If you believe there was a problem in the way the CCJ was issued, it’s important to speak to a specialist debt advisor before going ahead with the application to set the judgement aside. Especially as the application to do so will cost £255, and require you to attend a hearing.
What is worse, a CCJ or a Default?
A County Court Judgement (CCJ) usually follows a Default, and is definitely the worst of the two debt problems.
A default means you’ve missed a number of payments, but you can still use a range of payment options to retain a lot of flexibility in your budget and lifestyle. And while it may have been better to act when you first started missing payments, the main impact will be on your credit score assuming you can agree a debt solution with your creditors.
So, unless you really need to take out further credit for a mortgage or loan, it’s possible to fix a default over time without a drastic impact.
But a CCJ is a legally enforceable court action. The hit to your credit score will generally be in addition to a previous default, and you’ll also be added to a publicly accessible register. Not only is it seen as a bigger issue by lenders, but failure to meet the terms can result in visits from bailiffs or potentially the sale of your home.
Using Experian scores as an example, a default will lose you around 350 points depending on individual circumstances. A CCJ will only lose you 250 points, but this is in addition to any existing defaults, meaning a total of 600 points. Given that the average score across the UK is around 759, that means you’ll definitely have a Very Poor credit score (anywhere from 0-560 points).
The ability to pause or amend repayments is also much easier if you set up a debt solution in response to a default. Once a CCJ is issued, changes require an application fee, and potentially a court hearing unless you can convince your creditors to let you change to an IVA.
Loans and car finance with CCJs and Defaults
If you have a default or CCJ against you, then it will make applying for new loans or car finance much more difficult. You’ll certainly be rated as having a Very Poor credit score.
Some lenders will still provide you with finance even if you have a CCJ. But the amounts will typically be lower, and the interest rates much higher. You may need to secure the debt with a guarantor who will be liable for repayments if you’re unable to meet them, or by using a logbook loan against your car if you own it outright.
And a similar situation exists with car finance. There may still be offers available, but they’ll generally be much worse than those available when your credit score has improved and the default or CCJ has dropped from your history.
If you opt for a debt solution, then these will often have restrictions on the credit you can take out during the arrangements. There are no legal restrictions to entering into loans or car finance on a DMP, although it’s strongly recommended that you don’t. You could be seen as entering into a fraudulent debt that you know you won’t be able to pay back, or your existing creditors might be prompted to take legal action if they see you entering into further debt before you’ve paid what you owe them.
Other solutions, such as an IVA, DRO or bankruptcy all have financial limits on the amount of credit you are able to potentially access. And require you to inform lenders about your financial situation, along with anyone administering your debt solution before you apply.
For already existing car finance, such as a Personal Contract Plan, this will generally only be affected if you miss repayments on it. If the PCP offer comes to an end while you have a default or CCJ on your credit history, then this obviously limits the chance of swapping to a similar deal. But it is possible to end your agreement early under the Consumer Credit Act 1995 if you’re already paid more than half of the PCP price of the car, or by agreeing to pay the difference to reach half of the agreed PCP amount.
Are CCJs and Defaults visible if you’re not on the electoral roll?
Being registered on the electoral roll will make no difference to the visibility of a default or CCJ. These are both recorded on your credit history, and a CCJ is also recorded on the Register of Judgements, Orders and Fines which is publicly accessible for a small fee.
So, there’s no benefit to avoiding registering on the electoral roll when it comes to defaults and CCJs. But by registering to vote, it helps lenders confirm your name and address, and will actually improve your score.
Defaults & CCJs – next steps
Whether you’ve just received your first default notice or the process of a CCJ is underway, the most important things to do will be to stay calm and take steps to improve your situation.
Something as simple as contacting your creditors can begin to alleviate some of the pressure. And using the Debt Buffer letter templates can make it easier to inform lenders that you are investigating ways to solve your debt problems. Which can make them more sympathetic at every stage of the process.
If you’re starting to default on payments, then don’t get tempted to put things off. You still have a number of debt solutions available to resolve all of your financial problems in a way that makes sense for your situation. And that can also be affordable if you’re on a low income, or facing an issue such as redundancy or illness.
The earlier you take action, the sooner those markers will disappear from your credit score. Even if six years may seem a long time ahead, every month will make a difference when it means you can end repayments and start building up a better credit score.
And even though the prospect of court action or bailiffs can seem terrifying, you can still take positive steps during the CCJ process to ensure that any judgement is as reasonable as possible. By responding properly, you can make sure any judgement is affordable, and avoid the more worrying elements of debt action and enforcement.