Debt repayment plan

Helene Mueller
eCollect support team

A debt plan involves various default repayment methods available for indebted subjects. The debtors can be either individuals with consumer debt, or business organisations with corporate liabilities. In both cases there are non-government organisations that offer different strategies for clearing outstanding default amounts. A debt plan can consist of debt management and debt management plans, debt settlement & consolidation plans, etc. All schemes for clearance of defaults represent various agreements between two parties: first party- the lender and second party- the borrower. Such contracts describe new debt conditions for the debtor, which are easier to cover (e.g. monthly fees, lower interest, decrease of total debt amount, etc.). Although a debt plan consists of new debt terms & conditions, the subject of debt is still obliged to pay his liabilities towards the creditor. Depending on the type of default’s plan, there are schemes, which are appropriate for unsecured debts only, including consumer & corporate monetary obligations.

Personal debt plan structure

Such strategy can be carried out by the debtor himself, without the usage of specialised debt advice institutions. In order to settle the delinquent accounts, a borrower has to be clear about his outcome, income and amounts, which apply for debts each month. If the debtor has fallen into a past-due payment situation, he has to cut unneeded expenses and calculate his monthly income and spending. A consumer should strive to pay his liabilities in full each month, as paying the minimum requested debt amount is not considered as a settled sum and the borrower will be still marked as fallen into overdue payment situation.

In order to cover as much as possible monthly liabilities, a debtor should prioritise his monetary obligations to priority and non-priority debts. Priority defaults involve important debts with serious consequences, if not paid in time. Such include mortgage loans, household bills, council taxes, etc. In the case of mortgage debts, an important material guarantee is given as a collateral. This is usually debtor’s home or another estate property and the debt is known as secured. Failure to pay such secured loans can lead to property foreclosure. Non-priority debts usually consist of credit card & student debts, bank loans, etc., where there is no collateral following and debtor’s property cannot be forcefully repossessed.

Usage of debt-to-income (DTI) ratio and different debt calculators will assist the borrower in determining the total amount per month spent for defaults repayment. DTI ratio is also used by creditors for appraising whether the consumer will be able to cover the monthly monetary obligations and what is the probability percentage of borrower’s falling into debt. If the debtor carries out a well-revised budget debt plan, he can get out of a default situation faster. If the consumer has borrowed an amount but is not into a past-due amount situation yet, the same budget plan will help him avoid future overdue liabilities.

In the end, a debtor can try to personally negotiate with the creditor. If the borrower is in a difficult financial state, but is willing to pay his liabilities, the lender might agree to change the debt terms in consumer’s favour.

Managing a debt plan

This strategy is wide-known under the name debt management plan (DMP) and can release a borrower from a bad debt condition. In order to use such repayment option, a borrower has to estimate whether this is the appropriate debt plan strategy for his default situation. For debt management plans can be qualified residents of Scotland, Ireland (Northern), and United Kingdom & Wales. In United States this scheme is known as a debt repayment program.

DMPs are applicable for consumer debts, most often used for credit card defaults and education loans. This debt reduction scheme is not applicable for secured debts, as they are always followed by collateral as a guarantee and if the debtor falls behind with payments, the creditor is legally authorised to carry out property’s foreclosure.

Such debt plan will help the consumer prioritise his liabilities towards creditor(s) and will set more convenient monthly payments at affordable rates. There are organisations, which operate for free and can even represent the debtor in front of the lender and negotiate with creditors for better debt contract conditions. Although a debt management plan will prolong the payment period, it will provide the consumer with more suitable default terms and lower monthly debt fees. As this debt plan is not an official agreement and has no legal bindings, a creditor can agree to any terms, including freeze of future interest, decrease of full amount of debt, etc. and also both parties can cancel the new terms at any time.

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