Debt elimination

Helene Mueller
eCollect support team

Debt elimination is the process of reducing all loan payments & liabilities to zero, i.e. the total debt reimbursement procedure, until the default amounts are completely settled and the consumer is considered free of debt. To eliminate a debt in full, a consumer or a business borrower will typically need the help of special debt help agencies, which will guide the debtor throughout the debt elimination process, providing professional counselling and advice. In order to eliminate a monetary obligation, a consumer may need to borrow one more debt to settle the rest of his liabilities or to change the debt terms in order to make the monthly payments affordable and more convenient, complied with his financial condition. Sometimes debt elimination schemes can even lead to interest freeze or reduction of the total monetary obligation. The debtor can either prepare a lump sum and repay his debt in full, or go for an amortisation of defaults, where he will be able to make fixed monthly instalments.

Debt elimination strategies- pros and cons

 When a debtor prefers to borrow one last loan in order to recover all others and he can afford to repay his obligations towards his existing defaults after taking the last loan, he can go for a debt consolidation plan or debt reorganisation. This is also applicable, when the debtor prefers to make reduced monthly payments rather than one lump sum payments. When used, this scheme will decrease the total interest and monthly default amount. On the other hand, this will lead to prolonged repayment period, and additional fees for arranging the borrowed amount. Furthermore consolidating debt obligations is recommended only if the consumer will be able to clean all existing debts by borrowing the last one. Otherwise debt consolidation can extend the bad debt situation. As the last consolidated loan is typically secured, falling behind again with monthly payments can lead to foreclosure of debtor’s home or another estate property.

When a consumer is already making monthly payments, but he cannot keep up with the amounts and he needs changes in the debt agreement, debt management plan is appropriate. Such debt elimination schemes are dividing the total debt amount into lower and more affordable monthly reimbursement liabilities. This plan is prepared in accordance with debtor’s monthly income and expenditures for debts and other expenses. When applying for a debt management plan, the debtor will not only be assisted in relation with his obligation, but he will also be trained how to manage better his monthly budget. Furthermore debt elimination agencies can negotiate with the creditor for freeze of all additional interests. The disadvantages of this plan is that it is unofficial and the lender can reject the new debt terms at any time; he can also carry out legal and court actions, if the consumer falls behind with payments again. Although freeze of additional charges has been applied, the debt management plans last until the debt is repaid in full and this freeze can be applicable for shorter period of time than the whole debt elimination scheme.

If a consumer prefers not to be contacted by creditors anymore, he can file for Country Court Administration Order, applicable for UK and Wales’ residents. If his defaults total of no more than £5,000, he can apply for such order. From then on he will transfer all his payments not to the lenders, but to the court instead, which will direct the amounts to the original creditor. If the debtor experiences reduced income situation, the court can even lower his original monthly sums. The disadvantages of this debt elimination scheme are that the creditor can object the court order and the CCAO may not apply. Furthermore, if the subject of debt falls behind with his payments again, the court will most likely revoke the order and from then on the lender has the right to pursue his debts again.

If a subject in debt needs freeze of interest charges and a legally binding agreement, he can chose an Individual Voluntary Arrangement or a Company Voluntary Arrangement (if the debtor is a company), which are applicable for UK and Wales, but lately are also used in other countries as well. This scheme will freeze all additional fees towards the debtor and will bind both parties (creditor and debtor) to the new debt contract. This method provides repayment within a reasonable time-frame (5 years) during which the debtor must not fall behind with his payments again. An Insolvency Practitioner will prepare the plan and operate on behalf of the debtor. An IVA/ CVA is valid for unsecured debts only and includes specific monthly amounts to be paid. When the time-frame of the arrangement has passed, all remaining outstanding balance will be legally written off. These schemes are alternatives to bankruptcy but have more advantages. For example, if a company files for bankruptcy, it will not be allowed to continue its business, but if it files for a CVA, a commercial debtor can continue running his company. However, usage of such arrangements have their disadvantages as well: if the debtor falls behind with his payments again, the IVA/ CVA will fail and the subject of debt will be declared as bankrupted and an insolvency procedure will be carried out.

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