Debt repayment

Helene Mueller
eCollect support team

Debt repayment is the act of disbursing monetary liabilities, borrowed from a creditor towards the same creditor. This process typically involves periodic payments, which consist of monthly interest charges or of one lump sum transaction to be made, after which the debt is considered as cleared and settled in full. It is not obligatory that the borrower has fallen behind with his regular payments, in order debt repayment to be performed. Under this definition also falls the operation of keeping up with one’s regular payments. When a consumer or a business debtor falls behind with his appointed payments per month, the liability is marked as overdue and it is said that the debtor falls into bad debt. Each loan is followed by signing an official contract for the amount borrowed. This agreement includes total repayment period, dates for monthly payment, interest charges, etc. As the contract is bound by law, any breach of the agreement will also be considered as breach of law, no matter which party has violated the official document. Even if the first party (the creditor) breaks contract’s terms, the second party (subject of debt) is still lawfully obliged to perform debt repayment.

Debt repayment period & Debt repayment methods

There are different calculators available in various websites, which help consumers calculate the total repayment period they will need on the base of a specific loan amount and their monthly income. Such schemes are also available for business organisations, which need to borrow a monetary amount from a creditor. Debt payback periods for commercial debtors are more complicated than the individual schemes, as commercial loans are granted for investing in business projects, trainings, etc. Therefore the total project costs and the time for investment monetary return have to be correctly identified. On this basis a business borrower has to calculate the total company’s profit per month and the payback period.

There are different default repayment methods, known under different names, depending on the country of debtor’s residence. In Singapore such method is familiar as DRS (Debt Repayment Scheme), which is beneficial for both parties signed the debt contract. This is a legal option for debtors with no financial funds to avoid filing bankruptcy. The plan generally should be completed for 3-5 years, but there are also exceptions for people in severe financial crisis, who have suffered substantial financial losses and cannot afford to keep up with the debt payments anymore. The Debt Repayment Scheme is applicable only for unsecured debts and such no larger than $100,000.

Debt repayment schemes in Scotland are known as DAS (Debt Arrangement Schemes). This is appropriate for subjects in debt, who wish to lower their monthly fees because of financial income difficulties. When a creditor agrees to a Debt Arrangement Scheme, he is legally obliged to freeze all additional charges and interest applicable to the debtor. Therefore after the signature of a DAS a lender will not be able to charge any kind of fees on top of the clear debt amount owed.

Debt repayment plans

Debt repayment plans are another repayment method and comprise all types of quick default reduction and pay-off. They represent alternative bankruptcy solutions, which aim to assist a borrower in reimbursing his monetary obligations in a more financially convenient way. These plans include different clearance methods like individual debt management plans (DMPs) and management programs (provided by specialised credit counselling organisations or personally carried out by the debtor); consolidation & settlement strategies; and different default arrangements (Trust Deeds for Scottish residents and Individual & Company Voluntary Arrangements for United Kingdom and Wales). Bankruptcy application is also deemed as a debt repayment option. Consumers prefer using this repayment scheme, but it is not recommended, unless the debtor has no financial funds at all, as bankruptcy is a sustained process and severely damages consumer’s credit report for a long time (between 3 and 7 years, depending on debtor’s country of residence).

All these schemes offer various default contract changes in favour of the second party. Repayment methods are applicable for unsecured debts, as in secured loans the creditor has material guarantee from the debtor. If the subject of debt stops covering his liabilities, the lender can simply file a foreclosure order and repossess debtor’s property (if it is marked as a collateral). Unsecured debts are more appropriate for applying repayment plans, as they are not assured in any way. If the second party falls in difficult financial state, the lender can agree to change the debt term contract conditions.

Depending on the conditions the borrower wants to apply, he can choose between different debt repayment structure plans, which will offer him either official or informal agreement, either legally bound, or without any law obligations (meaning both parties can cancel the new contract at any time), short-term repayment or longer period for repayment, etc.

Used literature & external links