To reduce debt means to diminish bad debt amounts and defaults. Such proceedings are legal and can be performed by different legalised organisations, such as the creditor, a debt buyer, private debt solicitors, debt management agencies, banks, etc. Reduction of a debt can be executed by means of different repayment tactics and negotiation options. Some of the possible and acceptable debt reduction methods are debt consolidation, different debt management plans, debt settlement, etc. For countries like the UK, there is another option, known as Individual Voluntary Arrangement and Company Voluntary Arrangement (representing payment plans for respective consumer and business debtors) and the so-called Trust Deed used on the territory of Scotland. All these methods for reducing debt are usually used for unsecured debts. They can also be applicable for secured loans but in less often occasions. Reduce debt methods and schemes
The most widespread method for reduction is the debt consolidation scheme. It depicts the process of borrowing one final debt in order to cover other smaller default amounts. It is considered a method for lowering a debt because the consolidation of past-due payments consists of reducing the monthly interest rate charges. This repayment scheme can be used for borrowing both secured and unsecured debts. When lending a secured debt, the creditor will request a collateral from the debtor, but the interest fees will be lower. If the debtor decides to take an unsecured debt while using the reduce debt consolidation, the monthly interest rate will be higher and he can apply for an unsecured loan only if he possesses good credit history.
Debt settlement is another way to reduce debt, as here the creditor forgives a percentage of consumer’s monetary obligations and the debtor has to pay only the rest of the amount. In return the individual in debt has to perform one single transaction to the lender and the default will be considered as settled in full. Debt settlement is not applicable for secured loans, but only for unsecured debts, such as credit card loans, student and medical debts, overdrafts, unpaid membership fees, personal utility bills, etc. If the company offering such reduce debt plan is a private organisation, it has to be registered and act according to different laws and organisations. For example, in the U.S. all companies, performing debt settlement, have to be accredited and assigned by The Association of Settlement Companies (the so-called TASC) and the USOBA- the United States Organisations for Bankruptcy Alternative. Such organisations operate in consumer’s interest and protect him against different debt collection and debt reduction scams.
Debt agreement plans are another method for debt repayment and reduction. As aforementioned, in the United Kingdom and Wales are valid both the Individual and the Company Voluntary Arrangements. The IVAs and the CVAs have a limitation period of 5 years, while the Scottish personal agreement’s (known as Trust Deed) statute of limitation is 4 years. These methods can also be used for reduction of defaults. If a creditor agrees to such negotiations, an official law-binding contract is to be signed between him and the debtor. All additional charges and interest rates are to be frozen once the contract is signed. The consumer is obliged to pay only the clear debt sum. A creditor can also agree to reduce the total debt amount. It is possible the full default monetary sum to drop to 70%. Once the debtor repays the agreed amount, the bad debt will be cleared in full.
Implementation of a debt management plan (either organised by the debtor themselves or carried out by a professional debt management company) is another option to reduce debt. If the subject of debt uses the services of a private management organisation, he will also have to pay their commission fee, but they can usually deal lower interest payments from the creditors. If the lender or the DCA (Debt Collection Agency), operating on creditor’s behalf, has an internal debt management department, most typically the debtor will not have to pay extra for this reduce debt service.
A consumer in debt can decide to use less expensive way to decrease his debts. This can be accomplished by the execution of personal debt management, i.e. improvement of personal income management and prioritising payments and expenses. There is a simple formula, called the debt-to-income ratio formula. It generally shows the difference between individual’s expenses and gross monthly income. This formula can be found in many websites in the form of a ratio calculator (e.g. ext. link 4). It is reckoned that consumer’s percentage rate should be less than 36% in order the debtor to be financially able to cover his monetary obligations towards creditors.
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