Debt negotiation versus debt management
Loans and borrowings have become an integral part of our day-to-day lives, so much so that nobody blinks an eyelid at the thought of taking an additional mortgage. However, there is always an inherent risk of repayment plan going amiss. Sometimes, due to some unforeseen circumstances, it becomes difficult to pay those monthly installments or credit card bills. When such a situation arises, debtors start avoiding calls from debt collection staff, and stop replying the follow up letters. But this is when debtors must be open to debt negotiation proposals instead of becoming incommunicado.
What is debt negotiation? debt negotiation is a discussion between debtor and creditor, wherein creditor agrees to absorb some losses and/or revises terms and conditions of loan. This revision is based on repayment capacity of the debtor. Now, why would a creditor want to absorb losses? There is a simple rationale behind this. Normally, a creditor does a thorough check of debtor's credit profile prior to releasing the loan. Subsequently, however, the creditor does not keep a track of debtor's financial obligations. This gives debtor a chance to tap other sources of credit to a level that debts become difficult to manage. Creditor wakes up from sleep only when the installments are not received promptly. At this point, he has a choice to take a legal course. But legal course is expensive, as well as time consuming. It further carries the risk of other creditors also becoming wary. Once other creditors become aware of the situation, hell breaks loose. Other debts get called up much ahead of schedule, and debtor becomes insolvent. Such a situation drives the matter to bankruptcy court, and creditor is left with no choice but to wait for court's decision. Even here the creditor may receive much less than what he could recover by revising the terms and conditions and offering some discounts. Debtors, obviously, get the benefit of concessions, and discounts that creditors are willing to offer in these debt negotiations.
Debt management, on the other hand, refers to a systematic and disciplined way of coming out of debt-trap. It could involve more than one debt negotiations in cases wherein the debtor has taken loan from multiple creditors. In addition, it may mean consolidation of all debts into one or two debts that carry lower interest rates and are repayable in smaller installments over longer period of time. Obtaining refinance is another method of debt management. The process, no doubt, will be painful, and involve a lot of legwork as well as negotiations. Various refinance and mortgage products will have to be examined, and cheapest loans of long tenure will have to be obtained. Creditors will also have to be convinced that they are better off by accepting the debt management proposals.
The major differences between debt negotiation and debt management are:
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