Debt settlement

Helene Mueller
eCollect support team

Debt settlement as a general definition is in the meaning of using different methods and plans for settling a debt amount. As a financial term, it is defined more specifically as the process of additional negotiation for payment of a debt amount, where the negotiated sum is usually less than the total default monetary sum. This is a clearing-debt option, where the indebted subject settles the past-due payment, transferring a smaller amount to the creditor, and the debt is considered as settled in full. The process is also called final debt settlement. A debt settlement is usually performed by a third-party (usually a professional debt collection agency, or a private debt lawyer), where the debtor is allowed to pay less (usually up to 70-80% of the total debt sum). A debt settlement can be carried out either by a specialised debt settlement company or by a DCA (debt collection agency), which offers preparation of such payment plans for the subject of debt.

Features of a debt settlement plan

A debt settlement plan is an affordable option for indebted individuals, who prefer to clear the debt quicker in a shorter period of time, but do not have the financial funds to pay the full original debt amount. This process is also called “debt negotiation”. A debt settlement is a better option for the creditor, rather than waiting for the consumer to file bankruptcy (if there is such risk). When a creditor hires a debt collection agency, the DCA will send its collection agents at a certain moment of the debt recovery process. These agents can be standard DCA agents, enforcement agents, bailiffs or even debt collection lawyers. Although the last two are legally authorised to seize belongings in order to clear the debt, they usually prefer to offer different negotiation plans, as the debt settlement plan. When the debtor agrees on the specific terms, a new contract is to be signed and the consumer has to clear the default within a short period of time (a few days or a month the latest) and as one single transaction.

Theoretically, a debt settlement plan can be applied to both secured and unsecured debts. But practically a creditor who owns secured debts will not agree on such negotiation plan, as secured debts are always followed by a collateral guarantee. If the debtor is not in the financial condition to generate equal monthly payments as agreed, the creditor is authorised to forcefully deprive debtor’s collateral (real estate property, car, or other valuable material possessions). When the subject of debt owes an unsecured debt, the lender has no material guarantee against eventual late payments. When the consumer falls behind with the monthly amounts and becomes in debt, the creditor has no other option but to try collecting the default by himself or mark the amount as a written-off debt and transfer the collection process to a debt recovery agency. When a DCA sends its legal representatives for personal in-house visits, such debt settlement plan can be offered to the debtor. If both sides, the creditor and the indebted subject, agree on this plan’s terms, a debt settlement contract is to be signed.

When choosing debt settlement as an option, creditors usually prefer to use the same DCA, which has been hired for the collection process of creditor’s written-off sums. There are specialised debt settlement companies as well, but they charge a commission fee. In the end, using a private debt settlement agency will cost the lender a reduced debt amount and an interest fee on top of the debt sum. Some debt collection agencies have specialised and authorised debt settlement departments. They will prepare such negotiation plans and official contracts and their interest will be not more than the rate regulated by law (e.g. in the UK it is 8% of the full debt amount). They will rarely charge anything more on top of their original debt recovery services.

Debt settlement and debt relief

A debt relief or a debt reduction is a reorganisation of the debt amount and a change of the original contract between a first party (creditor) and a second party (debtor). When the debt relief is partial, it can be considered as a subdivision of debt settlement. Both terms refer to reducing the debt balance to an affordable percentage sum for the debtor. If the consumer is in a severely difficult financial state, the creditor might agree to reduce the original debt amount, so that the debtor will have to pay only a percentage of the total sum, and the rest will be forgiven.

Debt relief and debt relief orders are often considered as similar meanings, but the terms have a strong difference between them. Debt relief is typically performed by the creditor and with his agreement, while the debt relief order is subordinated to law and is only worked out by the court.

Used literature & External links