Clear debt

Helene Mueller
eCollect support team

To clear debt is the procedure of repaying past-due monetary obligations by a subject of debt towards a creditor. The course enlists different reimbursement techniques, which involve changes in the debt agreement conditions, decrease of monthly fees or interest, etc. Special debt management companies or various debt help organisations can be involved in the clear debt process, participating at debtor’s request. This occurs, when a lender pursues his late payments from the consumer but he is not averse to change the contract conditions in order to assist the indebted subject. Such agencies offer debt repayment options and also provide debt advises, while protecting consumer’s personal information. Sometimes the lender can agree to negotiate the agreement terms with the borrower, if the debtor has severe financial difficulties. It is more beneficial for both parties to avoid bankruptcy, as this process will not only ruin debtor’s credit profile, but will also make the default amount uncollectible for the creditor. All clear debt methods are forms of debt relief, as in all of them there is a financial alleviation for the subject of debt.

Payment plans & strategies for clearing debt

There are various methods to clear debt and negotiate more convenient debt terms. Some debt repayment methods and debt clearance plans are: debt settlement, debt management plans, and debt consolidation, along with different personal and corporate arrangements (IVAs- Individual Voluntary Arrangements, and CVAs- Company Voluntary Arrangements, applicable for residents of the United Kingdom). Typically unsecured debts are eligible for these clear debt methods, as the secured loans are always followed by a collateral, which is most often debtor’s home or other estate property. Such collateral serves as a guarantee and if the debtor falls behind with his regular payments, the creditor does not have to negotiate with the borrower in order to collect the outstanding amounts. When the debt is secured, the lender has the right to forcefully repossess / seize debtor’s property.

Although the aforementioned clear debt methods sound similar as a definition, these processes have different meanings. While a Debt Settlement Plan (DSP) stands for decrease of debt amount in exchange of one single payment, a debt management plan (DMP) is contributed to simple monthly transactions until the outstanding amount is cleared.

Debt arrangements are official and legal contracts between lenders and subjects of debt. In UK, depending on whether the debt is individual or commercial, the process is named as “Individual Voluntary Arrangement” for consumer defaults, and “Company Voluntary Arrangement” for business debtors. In Scotland a debt settlement plan is used under the term Debt Arrangement Scheme.

A debt management plan is unofficial agreement between the creditor and the debtor. It is not bound by law, and it is not necessary a legal representative to attend, as it is an informal written agreement. However, breaching both types of clear debt contracts is punishable by law.

Debt consolidation is performed as several smaller sums paid over an agreed period of time (e.g. monthly payments). Its aim is to comprise and bring together all debtor’s monetary obligations in one single monthly payment, which will lead to decrease of the total interest of all previous defaults, united by the debt consolidation. The reduction of interest rate depends on whether the consolidated debt is unsecured or secured.

Bankruptcy is another legal option to clear debt but it is not recommended unless it is the last resort. This method has more negatives than positives for a consumer. When filing bankruptcy, the borrower will be completely free of debt obligations, but he will not be able to candidate for any other loans, nor new bank accounts. The debtor will also lose any material assets of value, and is most likely to lose his home as well. Bankruptcy has different active time limits. In United Kingdom and Wales it is 12 months valid; in U.S. it lasts 3-5 years; and in Germany it lasts seven years.

Clear debt steps

As using a private debt management company, offering debt repayment plans, is usually connected with additional costs, the debtor has to begin the clear debt process by contacting a non-government organisation, which works as charity and offers completely free debt advises. Such institutions aim to provide professional help to individuals, which do not have the sufficient funds to choose paid debt advise. Hiring a private company to negotiate with debtors is costly and can implicate the consumer into worse debt situation. Therefore charity debt help organisations are always a better option, as they can not only advise a subject in debt, but also act on their behalf and work out an agreement with the creditor.

It is possible for the debtor to conduct private negotiations with the lender. If a mutual agreement is achieved, a new debt contract will be made and signed again by both parties. No matter the terms of the agreement, the debtor will be still obliged to cover his obligations towards the creditor but under different terms.

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