What is a Default Notice (And How to Deal with it)

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Summary:

This guide looks in detail at default notices, including what a notice of default is, why they are issued, how to identify a notice of default letter, and what you should do if you receive one. We also look at what happens if you do not or cannot pay the money you’re being asked for, as well as some errors that can occur around default notices.

A Default Notice – officially known as a “Notice of Default” – is an official warning letter from a lender that they are required to send before they register a “default” against your name with a credit reference agency. It will be sent if you’ve missed at least 3 payments – and it gives you limited time to make payment before your credit rating is damaged.

How does a default notice work?

When you sign up for certain forms of credit, both you and the lender agree to follow a set of rules that are explained by the Consumer Credit Act (1974). The borrower’s rules are quite simple and mostly relate to making your payments on time. However, a lender’s rules are more complicated – and they involve lots of information about how you should be treated.

An important part of what lenders agree to is how they will treat you if you have any missed payments or fall behind with your monthly payments. Part of the Consumer Credit Act explains that they must let you know before they register any negative information about you with credit reference agencies.

This is where a Notice of Default comes in. If you miss more than 3 monthly payments, the lender has a right to have a “default” marked on your credit file.

This is a way of letting other lenders know you are missing payments – and it will reduce your credit score and make it less likely that you’ll get credit in the future. However, the lender must let you know they’re going to do this – and they do that with a default notice letter.

How will you know if you get a default notice?

For most people, a default notice won’t come as a surprise, as it usually happens after at least three missed payments.

However, it’s useful to know what a default notice looks like – firstly, because you only have a limited amount of time to deal with the issues, and secondly because default notices are sometimes sent by mistake.

A default notice will always come as a formal letter to the address that the lender has registered for you. The envelope will often be marked to say it is an urgent communication and should not be ignored. The letter itself will have “Notice of Default” marked clearly at the top of the page and will explain that it is a notice they are required to send to you before taking any further action.

How long do you have between a notice of default and a default being registered?

The Consumer Credit Act says a default notice has to be sent out to a customer at least 14 days before the lender registers a default with credit reference agencies.

The letter will explain how much you owe, how you can make payment, and the cut-off date for making payment.

What if you can’t make payment in full after you receive a default notice?

Since a default notice comes to you when you’re at least 3 months behind on your payments, the amount you have to pay to get caught up is likely to be significant. If you haven’t been able to make your agreed payments, it’s very possible that making a full payment to catch up is going to be very difficult or impossible.

Even if you feel you can’t catch up with the missed payments completely, it’s important to get in touch with the lender as quickly as possible and discuss what’s possible.

Explain to the person you talk to why you haven’t been able to make payments. You won’t be the first person who’s run into difficulties, so they will almost certainly have some ideas about how you can get caught up. They may offer you a payment plan – either increasing your monthly payments moving forward, or possibly even extended the length of your credit agreement so you can pay a little less monthly but over a longer time.

There’s no guarantee that the company will agree to anything but full payment – but it’s important to ask.

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What happens if you’re not going to be able to pay your monthly payments moving forward?

If you’ve fallen behind on your payments for at least three months, you may not be able to make future payments.

If this is the case, it’s important to tell the person you speak to when you call the lender. All lenders would rather know your realistic position than put together a payment plan that won’t be met.

If you miss future payments, you may find that you’re subject to legal action too. For example, the lender might apply for a County Court Judgment (CCJ) at your local court. While a CCJ effectively orders you to make a repayment, the process involves looking at how much you can repay. The CCJ process is hard work for you and the lender – so most would rather come to a repayment agreement with you directly rather than wait for a CCJ application to progress.

Again, lenders may not be able to help if you can’t make your payments – but you should ask. They may also give you some contact numbers that will help you get free debt advice.

What happens if you ignore a notice of default?

If you’re someone who has a drawer full of unopened letters from creditors (people or companies you owe money to) – you’re not alone. The trouble is, putting demand letters in a drawer doesn’t stop the collection processes happening behind the scenes with your lender.

If you ignore a default notice, there’s a strong possibility the lender’s next step will be to instruct a debt collection agency to put more pressure on you to make payment.

A debt collection agency is dedicated to chasing debt – so you can expect them to try to make contact with you in a number of different ways, a lot more frequently than the original lender has. They will very possibly call, message, email, and may even send agents to your home if you simply ignore missed payment notifications and don’t get caught up.

In short, dealing with a debt collection agency can add a huge amount of stress to day-to-day life, and they may even add their own fees to what you owe. So, it’s a good idea to make sure your notice of default is dealt with, even if it feels like a stressful thing to do in the short term.

If you ignore the debt collection agency’s attempts to recover the money you owe, you could then face legal proceedings – which will usually add even more costs to what you owe and can cause more significant damage to your credit score.

Does a default notice affect your credit rating?

The default notice itself will not affect your credit rating – it’s just a warning. However, if you do not act quickly to catch up or make an agreement with the lender, they will register a ‘default’ against your name.

The default itself will damage your credit rating – reducing your chance of getting credit in the future.

Do you need help with defaults?

Can you get a default removed from your credit file?

Usually, it’s not possible to have a default removed from your credit file. However, if you feel your default shouldn’t have been added, there could be a way.

If you’ve got a default because of an error, you’re within your rights to have it “revoked” – which wipes it from your credit file.

While rare, errors do occur, especially if:

  • You haven’t missed any payments
  • You have already paid the debt in full
  • You have missed less than 3 months of payments

If you believe any of these things have occurred but you’ve been issued a default anyway, you should contact your creditor and ask them to remove it. They will have processes in place to review your claim and remove the default if appropriate.

If the lender in question will not remove the default but you’re confident that you shouldn’t have been issued it, you can escalate your complaint to the Financial Ombudsman, explaining exactly what’s happened. While the Financial Ombudsman won’t deal with the problem directly, they will communicate with the lender on your behalf, making sure the appropriate procedures have been followed.

 

Key Takeaways

A default notice is a formal letter lenders must send before they register a default on your credit file.
A notice of default gives you 14 days to make payment before a default is registered.
Some lenders may be willing to discuss a payment plan to catch you up rather than register the default, but not all will.
A default will damage your credit rating, as future lenders will see it if they carry out a credit check.
Sometimes, default notices and defaults are issued in error. You should check to make sure yours has been issued correctly and let your lender know if you think there's been an error.
Maxine McCreadie

Maxine McCreadie

Author/Debt Expert

Maxine McCreadie, prominent personal finance writer featured in Vogue and Yahoo News, delivers practical guidance, simplifying money management and championing financial literacy.

How we reviewed this article:

HISTORY

Our debt experts continually monitor the personal finance and debt industry, and we update our articles when new information becomes available.

Current Version

May 9 2024

Written by
Maxine McCreadie

Edited by
Ben McCormack

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