Debt Settlement & Negotiating With Creditors

Debt Settlement & Negotiating With Creditors

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Dealing with debts can be really messy if you don’t know how to handle it.

In Malaysia, personal debts are on epidemic rise. As per the official reports from the Bank Negara, in 2018 the overall household debt of Malaysia was about RM 1.18 trillion.

Of this 46.8% was for personal consumption including credit cards, motor vehicles, and personal finance. The rest 53.2% was related to residential housing loans.

If you are burdened with overwhelming debt, opting for settlement is an opportunity to get back on your feet more quickly.

Debt settlement may or may not be the right choice for you depending on your financial status. It is important to carefully understand the consequences before going for a settlement option.

What is a debt settlement?

Debt settlement is a permissible method of repayment for helping borrowers who face some financial difficulty. The settlement plan is structured in a way to reduce the hassles of repayment for debtors in crisis.

It is usually offered by debt collection companies who try to reduce the company’s debt by negotiating with the borrowers.

Debt settlement process

The debt settlement is an attractive option for consumers who owe more than their current financial capability.

Once the debtor discontinues their payments to the creditor, the accounts become increasingly delinquent. If such a situation continues, a point will be reached where the creditor will choose to sue or write off the debt as a loss.

Around this time, a debt collection company will be usually employed to collect the funds on behalf of the client. They will then begin to negotiate with you.

During the course of negotiations, you might be asked by the collection company to stop making any further payments to your creditor until an agreement to settle the debt is reached.

The company will try to work out a lump sum payment plan with the debtor, which will be less than the amount you owe.

Once all the payments are completed as per the agreement, the debt is considered to be fully settled by the creditor.

When negotiating with a creditor you must know?

Understanding how to negotiate with your creditors is the golden key to success before starting a debt settlement plan.

1.Evaluate your present situation

The prime thing to do before negotiating with your creditor is to asses how much you actually owe to them.

Make a list of past due accounts.

This should include

  1. Name of the creditor
  2. The amount which you owe
  3. The time period of non-payment

Once this is complete, you are ready to talk to your creditors.

2. Research your creditors

Researching your creditors is the next crucial step. This will help you to assess the settlement offer they accept.

The settlement policies are truly unique to each, such as the time and amount they will accept.

For example, some of them may not settle at all, and you might get sued, for some, you have to wait until the debt is sold off or assigned to the debt collector company, while for some others you may need to be late for at least three months before the creditor considers it for settling.

There are plenty of online forums where you could do research and interact with the past customers of your creditor.

Do keep in mind that just because the person you are interacting through the online forum got a partial waiver doesn’t mean you could also get one.

3. Figure out a repayment plan

Now since you have a good idea about your creditor and the amount you have to pay back, you could figure out a plan that is best for you. Do keep in mind to have one or two alternatives in the event that your creditor does not agree.

Your credit scores might be affected depending on your choice. 

Some of the most commonly used settlement plans are discussed below:

a. Workout agreement

A workout agreement is a good option if you are facing long term financial hurdles and have money just to keep your monthly obligations going.

With this, you are requesting your creditor or credit card company to

  1. Lower your interest rates
  2. Remove late fees
  3. Waive the minimum monthly payment

b. Hardship plan

Many creditors may consider hardship plans, which are either permanent or temporary, depending on the financial struggle faced by the debtor. 

For people who are struggling due to any serious problems such as severe illness or job loss, this would be a great option.

By opting for a hardship plan, you may lower your interest rate, minimum payment due, and fees.

c. Forbearance

For companies that are in temporary financial difficulty and expect their financial health to spring up soon, forbearance is an ideal option.

By choosing forbearance, your creditor agrees to lower your interest rate until the time you regain back your financial status.

Debt settlement

This is something that can have an impact on your credit score. However, it is the best alternative to bankruptcy.

In a debt settlement, you negotiate with your creditor to waive a certain amount from your overall debt so that you can settle with a payment that is less than what you originally owe to your creditor.

Once you start a negotiation, begin with a lower offer of repaying 50% of what you originally owe. Most creditors will eventually agree for repayment of 60% to 70% of your debt.

If you can promise an immediate transfer of money, chances are more likely that your creditor will settle immediately. 

4. Be cautious of the risks involved.

Although there are several negotiation options, each comes with it it’s own drawbacks.

The settlement you choose will be related to your financial status. With a proper workout agreement with your creditor, your creditor may nevertheless cut off your credit line for future, making your credit line no longer applicable. 

Your creditor might report your payment issues to the major credit bureaus, which would minimise your chance of getting loans in the future.

5. Talk to your creditor.

Once you have carefully evaluated all the possible options, call your creditor. In the scenario that your creditor is a company, ask for someone in the debt collection and recovery or accounts department.

Very politely explain your situation to them and factors which lead you to non-payment such as unexpected financial loss, loss of employment, sudden illness, or accidents.

Be ready to expect a no at first. Don’t lose hope and try to be persistent. Sometimes it takes several phone calls for them to agree with you.

Make sure to document every conversation you have with them. This includes, names and job titles, points of discussion, etc.

When dealing with debt, each company has its own policies and programmes, so do not assume that one creditor is the same as another.

6. Get the agreement in writing

Once you have finished negotiating with your creditor and reached an agreement, it is imperative to get the proposal in writing. 

The agreement should bear

  1. Your name
  2. The name of your creditor or the debt collector
  3. Account number 

Besides, it should also mention the details of the settlement, such as the amount being paid, the dates of payment, whether the payment will be on a lump sum or a monthly basis etc.

Keep all the necessary documentary evidence for future reference, including a copy of the letter. This is especially helpful in the cases where a debt collection company contacts you for the same debt again in the future.

7. Pay the amount and close the deal

Once you have reviewed and verified the agreement, it is time to pay the settlement amount. Once the payment has been made, from then on, you will no longer be responsible for the debt.

Can I negotiate my debts with my creditors?

Yes, you can. But before you do, you should thoroughly research the present situation of your debt and the amount of money you can manage to bring in. 

Be realistic in your approach to repayment. Even though you wishfully think of a particular payment plan, somehow, your financial situation might not be very supportive.

While negotiating with the creditors, do keep in mind that some may be trained professionals and well experienced in handling all types of debts. Pleading your case takes lots of time and effort.

Remain calm and focussed while negotiating your debts.

It takes solid persistence, and a thorough follow up to get your creditor finally agree with a settlement plan.

Is debt settlement really worth It?

The alternative to settling your debt is to be sued by your creditor, which may lead to your bankruptcy (as an individual) or winding-up (as a company). 

The Debtors Act 1957 has various provisions for arrest, imprisonment, and attachment of property if the debtor fails to repay back the debt.

If the court rules in favor of your creditor, you could end up in Bankruptcy, wage garnishment, or winding-up proceedings (as a company).

Garnishee proceedings– The court may pass an order directing you to forfeit all your properties or personal belongings until you pay back the debt. If an order of wage garnishment is passed, your employer will transfer a certain portion of your monthly salary until the debt is fully settled.

Winding up proceedings– if you own a company, all your company assets will be liquidated and sold off to pay back the debt.

If you are declared a bankrupt, the Insolvency Department will take control over your property & all your assets will be liquidated and sold off in an auction to pay back the debt.

Conclusion

Having a huge debt might feel overwhelming for anyone. The faster you pay off your debt, the better. Among all the negotiation strategies listed above, it is advisable to choose one which suits your financial status and your ability to repay

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