What is a repayment agreement?
A repayment agreement (also known as a ‘repayment plan’ or ‘debt repayment plan’) is an agreement between a creditor and a debtor outlining the terms and conditions for the repayment of a debt or financial obligation. Repayment agreements are used to help manage debts without the need for the creditor to go to court to recover the money the debtor owes.
When should I use a repayment agreement?
As a creditor, you can use a repayment agreement if someone owes you money and:
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you have sent them payment reminders
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the debtor accepts that they owe you money, and
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they are willing to make arrangements for the debt to be repaid
As a debtor, you can offer to use a repayment agreement if:
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you owe money to a creditor
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you want to repay the debt and want to make arrangements for the repayment, and
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your creditor agrees to a repayment plan
The advantages of a repayment agreement
Entering (or offering to enter) into a repayment agreement can be a useful way of avoiding legal action.
If you owe money to someone, you should consider taking this proactive step to avoid your creditor taking action against you.
If you are owed money, you can consider offering a repayment agreement to allow the debtor to repay you over a period of time that works for them. Doing this may help you avoid costly and time-consuming debt recovery action.
What to do next?
If you owe someone money, use a Letter proposing payment in instalments to record your offer to pay off the debt in regular fixed instalments.
If you’re a creditor and you receive such a letter and want to accept the repayment proposal, use a Letter accepting payments in instalments to agree to the plan.
If you want to formalise your agreement to repay debt in a type of loan agreement rather than a letter, consider using a Promissory note. This is an unconditional written promise to repay a debt, which sets out the names of the parties, the amount due, instalment amounts, provisions for interest, and the effects of late payment. For more information, read Loan agreements and promissory notes.
If any money owed is not repaid in accordance with a repayment agreement, the creditor can start the debt recovery process. This covers a wide range of actions, including:
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attempting to use alternative dispute resolution (ADR) methods, such as mediation or arbitration
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engaging a debt collection agency
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issuing a court claim
Failure to repay a debt can have serious consequences and can result in the debtor being declared bankrupt or insolvent.
