The term “debt services” covers the full package of processes carried out during collection of bad debts. These proceedings can be provided either for the creditor (therefore offered by specialised DCAs- Debt Collection Agencies) or for the borrower, when they need debt advice, debt help or legal services regarding court actions taken against them. Such services can be claimed also by a subject of debt, who has not fallen into a debt situation yet, but has difficulties concerning their s financial state. If one wishes to avoid falling into debt and needs help regarding budgeting their income or regarding a better repayment plan, they can turn to debt services agencies. Specialised services for debt help and assistance are most often very convenient for subjects of debt, especially when they have difficulties understanding creditors’ requests and DCAs’ actions. A particular debt services’ section even applies for helping a consumer understand their rights and protecting him as an individual (e.g. in UK one of the legislations, protecting debtors and clarifying their permitted and restricted actions is the Debtors Act 1869, ext. link 2).
Debt services for reducing defaults
Licensed agencies provide specialised debt services for credit reduction and clearance. Debt help companies’ service packages differ depending on their authorisation and licenses. Some organisations provide only debt help, including budget plans and free financial advices. Others can negotiate with lenders as well, representing the borrower and taking over all written and oral correspondence with the creditors.
Debt reduction services consist of wide range of schemes, clearance methods and counselling. Debt help agencies will first help the debtor with their income calculations. They can implement a special repayment plan, based on strict budgeting, which will include debtor’s monthly earnings, typical expenses and default taxes and interest. Typically, if the borrower follows the budget plan carefully, he will be able to get out of the bad debt situation without negotiating with the creditors for contract changes.
Sometimes debt budgeting plans are not effective either because the debtor has not followed it correctly, or because he suffered severe financial decrease of income. In such cases debt-counselling agencies will continue helping the consumer by starting negotiations with the creditor. Such arrangements consist of various reduction methods, which will decrease the full debt amount or will relieve the debt contract conditions. Reduction schemes generally include all debt clearance strategies:
- Debt management plans, where the consumer can receive decrease of monthly charges or monthly instalments;
- Debt consolidation, where the debtor will have to borrow one larger debt, usually a secured one, which will cover all past-due expenses of their old liabilities;
- Debt settlement, where the borrower will have to provide one lump sum payment and in return the lender will forgive the rest of the debt amount;
- Various arrangement schemes, which bind both sides legally and reduce the risk of contract breaching. If one of the parties, no matter if the creditor or the debtor, violates the new formal agreement, this will be marked as an infringements towards law and court actions against this entity might take place. Although, when agreeing to an arrangement scheme, the creditor is legally obliged to freeze all additional charges and taxes towards the debtor.
- Relief orders or as a last resort- bankruptcy. Relief schemes are filed only by court and in United Kingdom are known under the term Debt Relief Orders. They will postpone debtor’s liabilities for a certain period of time, during which the creditor has no right to pursue payment. After this period, if debtor’s financial condition has not improved or has become worse, the consumer will be legally discharged from all their defaults;
Debt services & debt management strategy plans
Management of special debt strategy plans is carried out by professional debt management companies. These plans are part of the debt services they provide. The process includes negotiation with creditors and arranging different change of debt contract term, which will improve borrower’s financial situation and make the payments more affordable and easy to achieve. As management plans and schemes are informal, many reliefs can be negotiated:
- Lowering the total debt amount
- Lowering the interest
- Decrease of monthly payments
- Prolongation of the repayment period
- Freeze supplementary charges and even withhold interest rates
- Partial forgiveness of the full debt sum, etc.
If the creditor is willing to agree to the new debt terms, he can apply one or more of the aforementioned points. Unfortunately, as the debt management plan does not legally bind both sides of the contract (lender and borrower), again both sides can return the old terms at any time. If the debtor fails to keep up with their obligations and settle them in time, the creditor can cancel the unofficial arrangement and directly proceed to legal and court actions. However, if the borrower pays their liabilities in time and does not have any late payments after the debt management plan has taken place, a lender will rarely cancel the agreement without a good reason.
Used literature & external links