What is debt resolution?

Helene Mueller
eCollect support team

Debt resolution denotes the process of resolving over-indebted borrowers’ severe financial issues and combines all types of debt help and debt advice schemes. Such methods focus on a high-quality and professional advice provided to business and individual debtors. If the mechanism is executed by a specialised resolution debt agency, it will also provide other debt clearance and settlement services in order to help the consumer get out of the bad debt situation. Typically all debt themes of resolution will decrease the total debt amount, reduce the monthly sums for repayment or change the loan terms. A debt resolution can be performed by a second party as well (the subject in debt), where he can use different tools and negotiation methods in order to arrange different debt contract changes or to carry out adjustment of his own monthly budget plan, which is the most appropriate and cost-effective method for self-dependent debt solution. Unfortunately a budget debt resolution will only settle savings problems (if it is strictly followed), but will not solve legal and court issues or drawbacks with the original creditor.

Debt resolution as a bankruptcy alternative

In order to avoid bankruptcy, a consumer can chose different repayment options for debt resolution. If he does not have the sufficient financial funds to hire a counselling agency with paid services, he can always chose charity organisations, which also provide debt help plans. Typically all resolution debt schemes comprise the clearance of unsecured monetary obligations only, as secured debts are rarely subject to negotiations with original lenders.

Although debt solutions possess certain drawbacks, resolving debt issues are the last resort before filing bankruptcy. If a debtor decides to negotiate with the creditors without using a third-party counselling agency, he can work out an arrangement with the lender. If the creditor has started legal actions against the borrower, the same can hire a law representative to act on his behalf at court. Typically most lenders will consent to an agreement plan, as this will be more beneficial for both parties, rather than waiting for the consumer to file bankruptcy. Insolvency procedures are damaging not only for the borrower, but for the lender as well: the process will severely harm debtor’s credit report, and it will make the amount due uncollectible for the creditor.

Debt settlement schemes are considered as part of the resolution debt strategies. Although the two terms sometimes fall under the same definition and they have the same objective, they vary as well. Their main aim is to reduce the total debt amount, to relieve debtor’s financial situation and to disencumber the borrower from his past-due defaults. If debt resolution is narrowly used as a law term, it requires the attendance of a law representative- an attorney. Debt settlement will not always request a solicitor to present. Basically settlement of debts is performed either by a professional financial representative or by an attorney, but it can also be carried out as an unofficial agreement between the two parties (borrower and creditor).

In countries like the United Kingdom, Debt Relief Orders and Voluntary Arrangements (Individual and Company) are also used as alternatives of bankruptcy procedures. A DRO is typically applicable, when the borrower has a decreased income and very low surplus income. In order to apply for such Order, a consumer must have assets estimated to no more than 15,000 UK pounds. After the DRO expires and debtor’s financial condition hasn’t improved, one will be automatically released from his liabilities. Voluntary Arrangements are used to decrease the total debt amount or to freeze interest fees. The official agreement is signed in the attendance of an insolvency practitioner. The borrower will not only avoid restrictions applicable for bankruptcy, but will also obtain more convenient monthly repayment sums, complied with his income, taxes and expenses.

Consolidate debt resolution programs

Debt resolution also includes consolidation of overdue defaults. The process represents the unification of all debts under one liability, combining all interest rates. After the completion of the procedure the borrower will have obligations to only one creditor, and the new debt will be most likely a secured loan. Such simplification of payments is appropriate for consumers who want to reduce their interest rates and monthly payments and who also have large number of overdue bills and monetary liabilities towards different lenders. Although debt consolidation leads to prolongation of the total debt repayment period, it will facilitate debtor’s financial condition, by applying lower monthly sums to be paid. If, however, the borrower falls behind again with his regular payment, after he has combined his obligations into a secured loan, the creditor will have the right to carry out repossession of property (e.g. debtor’s home or other real estates).

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