Dealing with debt

Helene Mueller
eCollect support team

Dealing with debt can be a long, complicated and costly process for the debtor. According to different government statistics (e.g. for UK & Wales), the average debt per adult for 2013 is more than £28,000. In order to avoid going into a deeper bad debt situation, a consumer should aim for using various repayment and clearance methods in order to strike off past-due payments. Sometimes a debtor had no deliberate attempt to fall behind with his regular payments. The reasons for overdue accounts can be sudden income drop, like job loss, personal injury, divorce, and other unexpected expenses. In any case, when a subject has fallen into a default situation, he should be informed about how to deal with his debt problems as soon as possible. A subject of debt can use the help of different professional debt consultation companies, which will provide one with an independent expert advice and offer different debt elimination methods and techniques. But first of all, a debtor should contact his creditors to inform them that he will not be able or he is already unable to keep up with the current debt conditions. If the individual is in a harsh financial situation, a lender can agree to change the debt terms, even without negotiating with a debt help company first. If the consumer, by some reason, does not wish to communicate with the lender regarding the bad debt situation, there are debt advice & help organisations, which will represent the borrower in front of the creditor and will protect debtor’s interests.

How to deal with debt – personal debt negotiation

A debtor can defend his interests and negotiate with the creditor without using help from debt advice agencies. This process is known as personal debt negotiation or informal debt negotiation. No matter if the subject of debt is an individual or a business borrower, one should prepare a budget plan and strictly follow it. In the case of personal debt, the consumer should estimate the total amount of income and expenses, plus all debt taxes and interest per month. If the debtor is a corporation, it should assess and document company’s positive and negative cash flow.

If a debtor estimates that he will not be able to cover the full debt amount in short-term (using debt settlement) due to financial funds’ loss, he can choose other methods, which will guide him through the “how to deal with debt” situation. The debt help & advice techniques include debt management (reduced monthly / interest fees), or official contract agreements like the debt consolidation (combining all debts, which will lead to lower interest), different voluntary arrangements (where interest and additional costs can be completely frozen), etc. All these methods can be carried out without the usage of a third- party debt help organisation, but some of them require legal representative or special court permission (i.e. IVAs and CVAs-Individual and Company Voluntary Arrangements; debt settlement, different relief orders and bankruptcy).

If the subject or organisation in debt has no monetary resources to continue paying his obligations, or if a creditor does not wish to postpone the debt payment and wait until debtor’s financial condition improves, the borrower can apply for a relief order (for UK & Wales- Debt Relief Order- DRO); or in the last resort- to file personal or corporate bankruptcy / insolvency. Although the last-mentioned schemes will damage one’s credit report, they can be the only option for an individual/company with very low or no income at all.

No matter if the debtor is already in a late payment situation or wishes to prevent such, a beneficial option for him will be prioritisation of debts by importance and consequences (the so-called priority and non-priority debt scheme). According to this method, the first debts to be cleared are these followed by a collateral or serious outcome if remained unpaid. Under this graph fall obligations such as monthly rent (if the debtor does not own his home), mortgage loans (if the subject of debt has marked his home or other real estate property as a collateral in a secured debt contract), utility fees, court fines, etc. Other debts like bank or credit card loans, different overdrafts, membership fees, and others, are classified as non-priority debts and can be left last for repayment. However, a debtor has to bear in mind that none debt should be ignored, as the interest fees will increase in time, in direct proportion to the prolongation of the debt repayment period.

When a debtor realises that he can no longer cover his debt obligations, he can either contact the creditor or make reduced or minimal payments in order to demonstrate his good intentions to settle the debt amount. This, however, will again increase the repayment period and the monetary sum of monthly interest, which will, therefore, lead to a larger amount to be paid in the end.

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