Debt negotiation

Helene Mueller
eCollect support team

Debt negotiation describes the arrangement process between two parties- creditor and debtor, of changing the conditions of a debt contract. It comprises different options for settling and clearing a default amount, and the scheme often results in a decrease of the total debt amount or a modification and change of the debt agreement’s conditions. Broadly the definition refers to and comprises all types of default repayment plans and methods, which can help and assist a debtor to overcome a past-due liability situation. Narrowly summarised debt negotiation is encountered as a synonym for debt settlement. Using the term in its broad meaning, it also includes the negotiation process between two parties. The first party represents the creditor and the second party is the borrower. However, a third party may be involved, which acts on behalf of the consumer in debt. Such third party can either be a non-government organisation, offering free debt advice services, or a private company, which request payment by the debtor for the provided debt help services.

Debt negotiation and debt settlement

When used as an equivalent meaning to debt settlement, default negotiation has the same statute as default settlement. This process is typically implemented by specialised institutions, operating on the part of the consumer, but a debtor can carry out such proceedings on his own. In both cases, a legal representative is required, as debt settlement includes officially signed and renewed contract between the first and second party. Once the agreement is signed, both parties are legally bound to adhere to the contract and respect the new terms. If one of the parties disobeys the conditions, such actions will be marked as a breach of law.

Debt negotiation in the meaning of debt settlement represents debt elimination and partial debt reduction. This method includes creditor’s agreement on reducing the total debt amount in favour of the borrower. The sum can decrease with 25-30% and more, depending on lender’s good will. When the negotiation is carried out and the agreement is signed and finished, the debtor will have a few days to 1 week to pay the outstanding receivables he owes to the lender.

Lump sum payment is beneficial for both parties, also known as the win-win- situation. Although the creditor will receive less than he originally lent, this will still be marked as a potential income in his financial system. This is so, due to the fact that when a consumer stops his regular payments and falls behind with his monthly liabilities, the creditor will mark these sums as loss and temporarily write them off. Therefore each successful payment is considered as a positive cash flow.

Debt negotiation & negotiation scams

Broadly used, the meaning debt negotiation can comprise the whole process of working out a completely new repayment plan. If the consumer prefers unofficial negotiation agreements, he can choose a debt management plan to be carried out. It is more compliant and adaptable method, as it changes the size of monthly payments and conforms with debtor’s financial state and income. The payment plan is worked out individually for each consumer or business debtor and applies only for unsecured loans.

Although there are companies, which offer debt management services and debt help in return for a payment from the consumer, they are not always legalised and registered to work out such debt solutions. If a consumer suspects that a debt help company is not legal, he should file a signal right away to a law and legitimised organisation. When hiring a professional debt negotiation agency, a debtor should beware of the following telltale practices (which are not only unethical but also illegal) and bear in mind that registered and licensed debt help organisations will not use such deceptive methods:

  • Companies, that request payment from the debtor prior to the service provided, i.e. where the consumer has to pay before the debt help agency has started the negotiation process with the creditor;
  • If the debt management agency refuses to send any kind of information whatsoever to the subject in debt, which can explain their fields of activity; Agencies, which request personal financial or other information from the debtor before an official contract between the agency and the consumer has been signed;
  • Companies, which claim to work for the government (but actually do not possess such license) offering “government programs”, which are not only non-existent but also illegal

Provide the debtor with no information about the duration of the negotiation schemes, and also gives no clear report of how much the service will cost to the consumer.

Used literature & external links