A Guide to Debt Settlement Procedure
Offering credit has a cost to the creditor: the value of the interest charged on an overdraft to fund the period of credit, or the interest lost on the cash not received and deposited in the bank. In both cases, a creditor would want to settle his account with the debtor on fair terms, and in a timely manner. The problem actually occurs when the debtor becomes unable to fulfill the complete terms of the credit policy negotiated by the creditor. In such a case, a debtor might be willing for certain debt settlement procedure or reduction on his account with the creditor. Thereby, a minor detail of what is settlement, how it works and issues related to such settlements are going to be the focus of the rest of this article. Debt settlement or credit settlement is a policy of reduction in the total amount of debt owed by the debtor (negotiated between the two parties) and payment is therefore made in full.
Negotiations on debt settlement are only successful if the creditor agrees to a reduction in the amount owed to him. Reduction can be done using a certain percentage of the total amount that is to be paid/not to be paid or a total figure in numbers that is actually let off by the creditor. Debt settlement procedure can only be done for unsecured debts and not the secure ones. Unsecured debts comprise utility bills; credit cards; loans; bounced checks and similar items. A settlement is only done on unsecured loan because there is nothing attached to these loans as ‘collateral’ (like a house or a car), as is with the case of secured loans. Such unsecured loans are only created for the sole reason that the company or the debtor has a good credit rating. This is why creditors are ready to settle such debts because they know that there is nothing they are going to get as ‘collateral’ in case a debt is not repaid on time.
As creditors are always willing to settle insecure debts, one of the prime reasons can be the threat of bankruptcy. A debtor, however good in credit rating, upon observing a downfall in his business and on the brink of bankruptcy, will try to pay as meager an amount as possible to the creditor. Conversely, a creditor knowing about the Debt settlement procedure the debtor is in, will try to get as much as he can from the debtor. In such a situation, both parties are required to maintain their composure and negotiate in a way that is beneficial for both the parties. Yet, if a debtor is not paying the amount owed, a creditor can force him into bankruptcy by filing a petition (in case debtor has not filed for voluntary bankruptcy himself) against the debt owing company in order to recover the amount owed. Alternatively, a creditor can also ask for restructuring of the debtor’s business to make it more profitable for future payments.
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