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Debt negotiation and settlementIn these days, borrowing from future earnings is a very common way of financing one's desires. However, such borrowings and their repayments need to be meticulously planned. Failure to do so may land an individual into financial mess. Even with financial discipline, and meticulous planning, an individual may still find himself or herself in financial problems. This may be because of circumstances beyond his or her control, like natural disasters, accident, loss of job, etc.
These are situations when the bills start piling up, and phone calls from lenders steal the peace. Instead of resorting to some extreme measures, the debtor must seek help from debt counseling agencies.
There are many debt-counseling agencies in United States that offer such services on no profit basis.
What to these agencies do?
These agencies examine the cash flows of an individual.
They first attempt to locate untapped resources and bring them into circulation. For example, leasing a part of the home would fetch some monthly revenues, which could cover some bills.
The next step is to plug all leak points. Instead of having two vehicles, only one could be used, the other vehicle could be sold, and family could organize their movements in a planned manner. This would help the family save on gasoline and vehicle maintenance. In addition, the family could sell the vehicle and use the funds to retire costlier debt or part thereof, thereby reducing interest burden.
Counseling agencies study the type of debts and prioritize them for clearing.
If these measures are likely to be inadequate to bring the debt under control, the agencies consider debt negotiation and debt settlement.
Debt negotiation and settlement at this stage only relates to unsecured loans of the individual.
Basically, debt negotiation involves approaching the lenders and seeking some changes in terms and conditions, for example
a. Asking for a moratorium; if the debtor has lost the job and is looking out for a new one, he could do with a respite. The lender would not be at a loss as the monthly dues will continue to be treated as debt and carry interest;
b. Obtaining additional loan on the same property (generally home equity loans, home refinance or home equity line of credit), either through enhancement or through second mortgage;
c. Requesting for lowering of interest; if the debtor is not very young, then repayment of loans at a future date may pose a problem. In such cases, if lender lowers the interest rates, outstanding amounts will not reach insurmountable levels and the debtor may manage to repay the amounts;
d. Requesting for extension of time for repayment of loan; this would lower the installments, thereby bringing the amount to manageable levels;
e. Requesting for partial waiver of the loan or interest; this could entail waiver of interest retrospectively or prospectively, or waiver of part of loan.
At times, especially when the credit is good, credit card companies compete to get the client. In such cases, the debtor may stand to gain a better bargain in terms of interest. However, any such offers must be studied in depth. Often such lower interests are valid for only a short period. It is necessary to examine whether major debts can be cleared within that span of relief. And what could be implications of subsequent hikes in interests.
Some lenders give debt consolidation loans. While negotiating for such loans it is necessary to examine the charges when clearing the previous loans and charges and fees for obtaining the new consolidated loans. The overall impact of these charges must be integrated in interest rates to ascertain whether or not such debt consolidation loans are worthwhile.
Lenders may agree to some of those proposals, if
a. They are likely to receive less than what is proposed, if the debtor files for bankruptcy;
b. They feel it is truly beyond the debtor to repay the debt, and it is not the debtor's fault, he has been victim of circumstances like earthquake, or hurricanes;
c. They observe that debtor has not landed into financial mess because of extravagant lifestyle
d. They feel there is no fraudulent intent on part of the debtor.
Debt settlement involves liquidation of some asset or assets, and using the proceeds thereof, to settle the costlier debts. Such settlement is offered by building in some discount therein, which may be unpalatable to the creditors. At other times, debt settlement may also involve an agency to which the debtor surrenders monthly surpluses, and eventually this agency bargains with the creditors to write off part of the debts, which may be almost as high as 50 percent. However, opting for debt settlement wherein creditors are forced to let go 50 percent of their amount, will invariably hurt credit ratings of the debtors.
There is a major difference between debt settlement and debt negotiation. Debt negotiation is preliminary stage of debt management. It may eventually lead to debt settlement. But, as far as possible, attempt is made not to put the lender at loss. Debt settlement, however, is more like a final word. If the lender agrees, some loss will have to be absorbed by him or it, immediately. For debt settlement, the debtor may also be able to take some loans on his or her pensions schemes, which may not be possible during debt negotiations. Sometimes costlier debts are settled with help of cheaper debts from some other source.
Is it possible for the debtor to negotiate and settle debts?
It is possible. However, the skills required for drawing up realistic budgets, and realistic estimates may be daunting. Information about various sources of finances, rates of interest, agreeable tenure, etc., may take time to collect.
Credit counselors generally hold certificates from National Foundation for Credit Counseling. Therefore, they are able to come up faster with various permutations and combinations that would be suitable to the debtor and acceptable to the creditors. In general, they are more aware of the products, interest rates, flexibility of terms, etc., and the credit unions, banks and institutions that offer such finance. However, it would be worth the effort on debtor?s part, to learn these aspects, especially, if he or she is taking help from a for profit credit counseling agency. Such agencies may offer biased recommendations, which may be detrimental to the interests of the debtor. In addition, they will charge for their services. So it is a question of buyer beware here.
Why is it better to negotiate or settle a debt?
If the debtor chooses to cling on to an asset, then he may be forced to file for bankruptcy at a later date. This is likely to adversely affect his credit report, which in turn will deprive him of cheaper loans in future, apart from becoming a source of embarrassment from time to time. However, if the debtor is confident of receiving some funds in near future, like maturity of some government bonds, etc., then it would be in his interest to negotiate the debt rather than to settle it.
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