Meaning of Loan Settlement – Loan Settlement is also referred to as debt settlement, credit settlement or debt negotiation. In this the creditor settles on a debt reduction considering it as full and final settlement given to him by the debtor. Loan settlement is an approach to debt reduction in which the debtor and creditor agree on a reduced balance and that will be regarded as payment in full.
Process of Loan/Debt Settlement
The process of debt settlement involves negotiating with the creditors and convincing them to reduce the overall debt and accept a lump sum amount. The process of debt settlement is deemed to be complete when the creditor grants your request and agrees to waive off a percentage of total amount that is due on you in exchange of a lump sum payment.
This process can be followed primarily in case of unsecured loans where you have not given any thing as a guarantee. In case of secured loans like home loan, auto loan, gold loan etc wherein your commodity is kept as a security, bargaining on reducing the debt amount is a tough task.
It seems to be a kind off win-win situation for both the creditor and the debtor. The debtor is saved from going through the court trials and tribunals and pays a reduced amount than what he actually borrowed. On the other hand the creditor is able to draw out whatever the debtor is willing to or able to pay without filling a bankruptcy that may ruin the chances of creditor getting at least some amount of what he had given.
When you make up your mind that you have to opt for a debt settlement, the next thing you need to do is to decide if you would want to hire a professional for the purpose or would you want to go about doing it on your own. You also need to know that when you hire a debt settlement company for the purpose they would charge you some fees in exchange of the service offered. If you decide to do it yourself, it is also good as you can prove to be a better negotiator instead of the debt settlement company.
It is important for you to make yourself running in deep waters when it comes to your financial situation while you go ahead with the negotiations with your creditor. You need to make the creditor understand that you are in a very poor financial condition and if he doesn’t agree to debt settlement he may ruin his chances of recovering whatever he maybe able to.
Before you place your request for a settlement, say for example with a credit card company, it is important for you to cut down your expenses on your credit card at least three to six months prior before sending in your request. After all no wise person would accept that you are in need of sympathy or your financial situation is weak if your credit card statement reflects frequent trips to hotels and volumes of shopping.
Before you head with your debt settlement, it is important for you to list out the bills in order of your priority. Before you make a decision of handing over the money make sure you have sufficient for necessities like food and rents etc.
You need to make sure that you clearly convey it to your creditor that you have been able to manage some funds and would want to settle one account before the funds get spent somewhere else. While you highlight that you have multiple accounts and you may use your funds elsewhere for settlement your creditor may strike a good deal.
It is advisable that you offer of paying up to 30 percent of the amount that remains unpaid at your end. Obviously, the creditor would try to strike something higher but if he asks for anything more than 50 percent, you may use that amount to settle your account with some other creditor rather than paying to this one.
It goes without saying that once you are able to strike a good deal with your creditor make sure you get the settlement in writing as a proof with yourself. Make sure that the amount paid by you should be marked as full debt settlement and should be mentioned in the agreement. This would save you from the trauma that you may get after the case is headed to a collection agency by your creditor.
Advantages of Debt Settlement
The very first visible advantage of debt settlement is this debt would go invisible from your creditors list, thus, helping you to plan your monthly budget and giving you scope for other settlements.
If it’s a debt that held a big proportion of your debt then obviously you will be able to buy some peace of mind once you have settled that debt.
The monthly payments will witness a fall as the debt settlement program would erase the interests and fees accrued on the outstanding amount.
Over limit fees would also go down once you join the debt settlement program.
Disadvantages of Debt Settlement
It becomes quite obvious that if you opt for a debt settlement your credit score is sure to witness a fall. You should note that all such loan/debt settlements are reported by banks and financial institutions to CIBIL and other credit rating agencies, which, in turn, calculate your credit score keeping in mind this or any other such settlements. This has a very bad impact on your credit score. There are high chances that your application for any kind of loan or credit card may get rejected in future as you are considered less trustworthy in terms of loan repayment.
While your debts get reduced by way of debt settlement, the balance that is waived off reflects in the income side of your balance sheet thus leading you to paying taxes on the amount.
Make sure you have enough funds to meet the settlement amount requirement. Your negotiations and settlement offer would go a waste if you default in your payments.
Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance.
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