What is Debt Negotiation

Most debt management solutions involve some form of debt negotiation. Basically, debt negotiation, also known as debt settlement, involves negotiations with creditors to pay off a percentage of debts owed.

Debt negotiation often suits both parties. For those in financial difficulties, it can result in more manageable repayments and, in more extreme cases, the opportunity to avoid bankruptcy.

For creditors, debt negotiations can sometimes offer the best chance they have of recouping some of their money. They also bring debtors in from the cold by offering a more manageable solution.

Debt negotiation most commonly takes place as part of a debt management plan (DMP) or an individual voluntary arrangement (IVA). In both cases a third party negotiates on behalf of the debtor.

In a DMP, a representative from a debt management company negotiates on behalf of the debtor to try to reduce repayments to a manageable level. This could involve negotiation on reducing repayments or waiving interest on loans. Well established debt management companies often have good relationships with financial institutions so can be in a strong position for debt negotiation.

Debt negotiation is also an essential part of IVAs. An IVA is a legally binding agreement to settle debts, normally with interest frozen and a significant amount of the debt written off.

Because IVAs are legally binding, they must be overseen by an insolvency practitioner, who will assist and guide debtors through the process. After initial consultation, the practitioner should prepare a proposal for creditors.

Once this proposal is examined by creditors, the debtor must enter with negotiation with them. The insolvency practitioner will act as a chairman in these meetings. IVA proposals are rarely accepted straight off and creditors usually seek to impose a number of conditions, so some negotiation is usually necessary.

Many consumers prefer not to use the services of debt management companies and sort out their own debt problems. It is perfectly normal for an individual to enter into debt negotiation with lenders themselves, but good preparation is needed.

It is best to contact creditors initially by letter, stating why you cannot keep up with debts and saying you would like to renegotiate repayments.

Once you arrange a face to face meeting, here are some tips to follow:

• Be sure about how much you can afford to repay each month and do not exceed that under any circumstances.
• Offer to make a token payment to reassure the creditor that you do intend to pay back all of the loan.
• Remain calm, polite and helpful at all stages of the negotiation.
• Keep all correspondence you receive from lenders and send letters by registered post.
• Ask for confirmation of any new agreement in writing.

Debt negotiation can be the key to your financial wellbeing so it pays to ensure that you get the most from your lenders. Because of this, it may be a good idea to get professional advice before and/or during the debt negotiation process.