What is a Notice of Default and what does it mean?

If you’re struggling with your finances, you might find you’re getting lots of letters – possibly including default notices.

These letters – officially referred to as a ‘notice of default’ – are an official step that lenders have to take before they take more serious legal action against you.

In this guide, we’ll take a detailed look at what a notice of default is. We’ll explore why you might have received a default notice, what your next steps should be, and what happens if you ignore a default notice letter.

What is a Notice of Default?

When you sign a credit agreement, there are certain rules about how the creditor (the company you owe money to) deals with you.

These rules are officially called the Consumer Credit Act (1974) – and they explain that before a credit can take further action against you, they must warn you about what’s going to happen.

A notice of default is exactly this – a formal letter warning that the lender is going to ask credit reference agencies to register a ‘default’ on your credit file.

This usually happens if you’ve missed a number of repayments – usually between 3 and 6.

An official default notice will give you 14 days to repay when you owe. If you can’t or don’t, the company will proceed with registering a default against you.

What is a Default?

The term ‘default’ is actually a legal one – but in plain English, if someone has “defaulted” on a credit agreement, it means they have failed to do what they agreed when they signed.

So, if you can’t or don’t pay what you owe before the 14-day default notice time limit is up, the company will ask each credit reference agency to register the missed payments on your credit report.

Other lenders will be able to see this if you apply for credit further down the line, so failing to deal with a notice of default will generally make it harder to get credit.

The impact on your credit rating isn’t the only consequence of getting a default though. In fact, it’s often only the first step in further action the lender plans to take.

What Else Can a Creditor Do After Sending a Default Notice?

Sending you a notice of default and then registering a default against you is often just the first steps of more serious action that a lender intends to take.

If you don’t respond to the notice of default, the lender will usually cancel your account with them and stop you from using any more credit they may have already agreed to.

From there, they may:

• Pass the debt to a debt collection agency
• Start court proceedings against you – often applying to the court for a County Court Judgment
• Start proceedings to repossess items that are included in the agreement you had – for example, a car that you’ve bought using finance – or electrical goods that you’re paying for monthly

What Will a Debt Collection Agency Do?

If the debt is passed to debt collectors, they will chase you to repay what you owe. This might include letters, text messages, phone calls, and possibly even home visits, asking you to make payment.

Debt collectors are not bailiffs though, so they can’t come into your home and take your things.

There are rules around when debt collectors can contact you – but you can expect significantly more calls and letters compared to the original creditor.

They may also add their own fees for handling your debt.

You may be able to set up a payment plan with a debt collection company though – and this will usually stop any further action being taken against you.

What Happens if I’m Taken to Court?

If the original creditor or the debt collector decides to take you to court, they will have to apply for a county court judgment.

They will write to you letting you know this is happening. If you don’t respond and make arrangements to repay when you owe, the case will be decided by a local judge.

You will have your chance to explain your side of the story – but in most cases, the judge will order you to pay back what’s owed.

Unless you pay the full amount quickly, this will result in a CCJ being registered on your credit file. This will make it much harder – and sometimes impossible – to get credit for 6 years. However, if you stick to the payment plan laid out by the judge, no further action will usually be taken.

What Happens if My Things Are Repossessed?

Sometimes, a credit agreement will include the item that you’re paying for. This is often the case if you buy a car using credit – and is sometimes the case if you purchase home or electrical items that you pay for monthly.

These items act as ‘security’ for the debt. If you fall behind on payments and have a default registered against you, the company will usually try to take back the item you have bought.

This may involve enforcement agents coming to your home.

If the item is taken back, it will then be sold, with the amount it sells for (or a previously agreed amount) being taken off what you owe.

The debt collectors or the original creditor will then continue to pursue you for any balance left unpaid – this could involve further legal action.

Can You Stop a Default Notice?

Yes, you can – but you have to act quickly. If the 14-day notice period has gone by and you haven’t taken any action, the notice will be added to your credit file and can’t be removed.

To stop the default from being registered, you should talk to your creditor as quickly as possible. In some cases, they will come to an agreement that lets you get caught up with what you owe. However, in some cases, the creditor will not be willing to accept anything other than a full repayment of the debt.

Can you Have a Default Notice Removed from Your Credit File?

Ordinarily, a default cannot be removed from your credit file when it’s issued – but there are exceptions to this rule.

If the default has been issued in error, then you have a right to have it ‘revoked’ – meaning it’s wiped off your credit file.

Errors can happen for a number of reasons, including:

• If you have already paid the debt off in full
• If you haven’t missed any payments
• If you have missed less than 3 monthly payments

If any of these circumstances apply to you, the creditor should remove it. However, if you slip behind any further, they may move quickly to issue another – so it’s important to stay on top of your repayments if a default is removed.

If the creditor doesn’t agree to remove the default, but you’re confident that you shouldn’t have been issued with one, you should contact the Financial Ombudsman, explaining the situation and that you don’t think it is fair. The Financial Ombudsman won’t remove it directly – but they will act as a go-between and look at what’s happened and ask the creditor to take action if they feel it is appropriate.

What Should You Do if You Get a Default Notice?

The best thing to do is act quickly and call the lender that has sent you the notice. If you ignore it, the default will be registered against you after the 14-day period has passed.

Start by calling the lender. It might feel uncomfortable – but they will have many customers in exactly the same situation as you, so your situation is not out of the ordinary.

They should speak to you professionally and politely, explaining your options.

They may insist that you make full repayment of the debt – but in many cases, they will be willing to set up a payment plan that allows you to catch up with what you owe. Since you’ve fallen behind on payments, they might stop you from accessing any more credit with them – but they may also freeze any interest you’re paying too.

What Happens if You Cannot Afford the Monthly Payments You’ve Missed?

In recent years, lots of lenders have been found guilty of ‘irresponsible lending’ – giving people credit without first checking that they can afford the repayments.

If you’ve missed payments because you can’t afford the credit you’ve been given, you might be able to have any default removed if you can prove that the lender has given you credit without checking you can afford it first. This has often been the case when people are given high-interest payday loans.

If you think this might apply to you, you should start by explaining to the creditor that you think you shouldn’t have been given the credit in the first place.

If they agree, they may look at reducing the debt and stopping – or removing – any action they’ve taken against you, including a default.

If the lender doesn’t take action, but you feel you’re the victim of irresponsible lending, you should contact the Financial Ombudsman, explaining the situation and seeking their advice.

Does a Default Notice Affect Your Credit Rating?

No. The default notice is really just a warning that the lender is going to register a default against you and possibly explore legal proceedings if you don’t pay back what you owe.

The notice itself is not registered on your credit file – but if you don’t settle the debt within 14 days of getting the notice, the actual default will be registered, and it will reduce your credit rating when it is.

If a default is registered on your credit file, it will remain there for 6 years. However, as these 6 years pass, the impact the default has on your score reduces. You may even decide to add a ‘notice of correction’ to your credit file – explaining why you got the default. If it’s a one-off, this can help future lenders see your side of the story – and it may mean they ignore the default when making their decision.

Default Notice: A Summary

If you’ve found yourself missing payments and can’t or don’t catch up, you may find that you’re sent a default notice. This is a company’s way of telling you they intend to register a default against you if you don’t pay back what you owe within 14 days.

When a default is registered against you, it will damage your credit score and can then lead to more action – including attention from debt collection companies, repossession of any goods included in the credit agreement, and possibly even a county court judgment.

If you can, it’s a good idea to catch up with what’s owed before the default is registered. However, this isn’t always possible. If you can’t catch up, you should try to come to a repayment agreement with the original creditor – or seek free debt advice so you can explore the other options open to you.