Debt Settlement

Financial Dictionary -> Debt -> Debt Settlement

In times of financial crisis, debtors often become insolvent and cannot deliver their monthly payments anymore. Such circumstances precede debt settlement alternatives.

There are several ways of proceeding with a debt liquidation: credit counseling together with debt management plans, loan modification, and arranging new terms of the loan agreement on an individual basis.

In contrast to debt settlement, credit counseling does not involve reduction of the principle. The borrower has to pay off the whole amount of the debt. On the positive side, debtors enrolled in credit counseling programs may negotiate better repayment terms or lower interest rates with their creditors. Naturally, this option is available to borrowers who firmly stick to their debt management plans. Credit counseling companies offer initial advice, assess the financial circumstances of the borrower, and prepare a debt management plan. The latter establishes realistic monthly payments which are tailored to the specific situation of the client. The credit counselor will firstly calculate the amount of money needed to cover all priority expenses of the client: mortgages, council tax, utilities, etc. Priority debts are serviced first. Non-payment of these loans gives the crediting institution the right to deprive borrowers of their liberty, property, and other essential goods or services. The remainder is deposited with the credit counselor and distributed among low priority creditors.

The length of repayment depends on the total debt amount and the level of repayment. In general terms, the total debt is divided by the monthly payment amount, as established in the debt management plan. The result shows the number of months envisaged for repayment under the plan. Together with the counselor, the client makes periodical reviews of his or her income and expenses. The monthly payment may be increased in case of favorable financial circumstances.

The second option, loan modification, refers to a permanent adjustment of one or more of the mortgage's terms. The loan is reinstated as to allow more manageable monthly payments. Typically, lawyers and legal entities, specializing in loan modification, offer advice on mortgage adjustment procedures. Your attorney will fill in and present an application and relevant documentation to the lending institution. The advantages of loan modification are lower interest rates and monthly payments, reduction of the loan balance, re-amortization of the loan to include past dues, and grant extensions on the payments.

The third option presents the debtor as a born diplomat who has the courage to negotiate his debt personally. He shouldn't be afraid to act independently as the statistics tells about many successful stories of the kind.

Debt settlement alternatives may not be the perfect solution for escaping bankruptcy, but at least they are some, especially if the debtor chooses a reliable company with successful cases history.