Debt can be one of the hardest things to get out of, especially if you are unable to meet repayments. That happens to most of us at some point and to get out of hot waters, it may be a decent idea to arrange an informal arrangement with the creditors, so that they can rest assured what they are owed will be recovered and the debtor can pay on easier terms.
If you do not know how informal debt arrangements really work then here is an explanation that is fairly easy to understand. Sometimes the debtor is in excessive financial crisis and if he/ she files for bankruptcy, then the creditors most likely don’t get anything. Creditors are well aware of that. So instead most creditors don’t mind informal arrangements because at least they will see their money in this case.
What happens is that a debtor will let his creditors know of his financial situation and his monthly income. Based on his/ her monthly income and his/ her monthly expenses, the debtor and creditors arrange a fixed amount that is fair to all the creditors and easy to pay off for the debtor. The debtor can also ask his/ her creditors to freeze interest and other charges on the debt.
The biggest advantage of this informal agreement is that this method is a fair and transparent method of distributing payments among all creditors.
If the debtor’s financial situation was to change in the future to more favorable levels, then he/ she can always renegotiate the terms with the creditors and increase the amount of the instalments to get rid of the loan quicker. If the circumstances change in a less favorable way, then he/ she can always communicate the change to the creditors and alter the terms of the prior arrangement.
Debtors can actually hire a professional agent or money advisor to negotiate the informal arrangements but with the right words and pursuing skills, he/ she can always speak to the creditor herself/ himself and work a different arrangement out.
Although the pros look quite appealing, there are cons to this method. For starters, the loan is payable in full. There is no reduction in the principal amount and it has to be paid. Hence, it could take a long time to pay off the entire loan or loans. There is also a chance that the creditor may refuse to freeze the interest and other charges on the loan. This means that the debtor will be burdened with a lot more to repay, in small instalments. However, it is advisable to ask the creditor anyway when you negotiate the informal debt agreement.
Although informal debt arrangements are recognized by the law, there is still a chance that the creditor may refuse your offer. In cases like these, a debtor is advised to seek the help of a professional or an advice agency who can do a better job at negotiating the terms of the informal agreement. If you arrange the informal agreement well, then there are chances that the matter will never go to court. In case the creditors do take the matter to court and you are recognized as a home owner, then there is a possibility that the creditors may get a charging order on your property.
Once the informal agreement is in place, the debtor is solely responsible to take care of all the repayments as well as keeping the creditors updated of any changes in his/her financial status. Although, this method of repaying debt really works and in the favor of the debtor, there is the small issue of a negative impact on the debtor’s credit score. Although, some things are irrespective of the credit score, it is fair that the debtor be aware of how the agreement is affecting him/her.
In some cases, the creditors agree to these terms for a limited period of time so that the debtor can work some things out and take some time to improve his/ her financial conditions and then later return to the original terms of the contract.
If you are in debt and are looking to get an easy way to get out of it without going bankrupt, then you may want to look into informal debt arrangements. Before you do so, it is advisable to talk to a money advisor or a similar professional about the size of your debt, the kind of debt owed as well as the size of your monthly income. If, indeed, the agreement is allowed based on your current financial status. If so, then you may have just found a great way to deal with all your debts and financial obligations.
In cases of late payments or on the brink of bankruptcy, it is crucial to negotiate with the creditors and see if you can work a deal out that can help both the parties. In such an event, informal arrangements work better than formal dialogue. In this article, we will discuss the benefits of informal arrangements.
Steven Rooyen is a husband, father, senior debt advisor and a financial consultant at Sort My Debt. With over a decade of experience in different financial fields, Steven has provided debt relief in Australia and helped people resolve their debt problems without applying for bankruptcy. While not doing that, you can find him reading books and hanging out with friends.