What To Know About Out-Of-Court Debt Restructurings
Dealing with debt can be really stressful and overwhelming. If you’re struggling to keep up with credit card, medical, or other debt payments, an out-of-court debt restructuring could provide some relief. Here’s what you need to know about this option.
What is an Out-of-Court Debt Restructuring?
An out-of-court debt restructuring basically means working with your creditors to change the terms of your debt outside of filing for bankruptcy. The goal is to negotiate a new repayment plan that reduces your monthly payments to a more affordable amount.
Some key things that can be negotiated in an out-of-court agreement include:
- Lower interest rates
- Reduced principal balance (partial debt forgiveness)
- Extended repayment timeline
Restructurings often involve settling debt for less than the full amount owed. Creditors may agree to this since it allows them to recoup more money than they would if you filed bankruptcy.
When Is It a Good Option?
Out-of-court restructurings can be a good route for people with regular income who have gotten behind on debt due to unexpected hardship like job loss, medical issues, divorce etc.
According to credit experts on Reddit, it’s best suited for situations where:
- You owe $10,000 – $100,000 in unsecured debt (like credit cards, medical bills etc.)
- Your debt is with 2-4 major creditors rather than many small debts</ li>
- You have some capacity to repay the reduced debt long-term
If you only have one primary debt or owe millions in business loans, other options like debt consolidation loans or Chapter 11 bankruptcy may be better.
The Process Step-By-Step
Here is the basic process for renegotiating debt out-of-court:
- Review your budget. Figure out how much you realistically can afford to pay each month towards debt. Be honest about areas you can cut back on spending.
- Prioritize your debts. Focus first on negotiating debt with the highest interest rates or most urgent consequences of non-payment.
- Research creditors’ policies. Check creditor websites and Avvo to learn their settlement practices.
- Call creditors. Explain your financial hardship and desire to settle debt. Have your budget and proposed monthly payment amount ready.
- Negotiate repayment terms. Be prepared to provide financial documentation. Don’t take the first offer – negotiate firmly but fairly.
- Get any deal in writing. Review the agreement terms closely and ensure all verbal promises are included before signing.
- Make payments on time. Late payments could void the new terms so be diligent about paying the agreed reduced amounts.
Tips to Improve Your Chances
According to debt experts on Quora, there are a few key strategies that can help in negotiating debt settlements:
- Lead with empathy. Don’t demand debt forgiveness right away. Explain your hardship respectfully and ask for their help.
- Offer lump-sum payments. Propose settling for a percentage of the debt (40-60%) in a large upfront payment.
- Use competition. Mention better offers from other creditors to encourage matching terms.
- Try goodwill letters. Write a letter emphasizing years of on-time payments and loyalty to request debt reduction.
- Consult attorneys. Debtor-creditor lawyers can advise if creditors are violating laws regarding collection practices. They may also negotiate on your behalf.
Know the Drawbacks
While out-of-court restructurings can provide debt relief, there are some downsides to understand according to FindLaw:
- Creditors are not legally required to settle debts or provide relief. They may refuse any offer and continue collections activity.
- Settling debt for less than the full amount owed can still require paying taxes on the amount forgiven.
- Agreeing to reduced payments could require signing away certain consumer rights and protections regarding that debt.
- Having accounts “settled for less than full balance” will negatively impact your credit score for up to 7 years. This could limit access to loans/credit in the future.
- If the negotiated terms end up still being unaffordable long-term, bankruptcy may still be your only option.
Trying to negotiate debt reductions on your own can be frustrating and ineffective. Non-profit credit counseling services provide free assistance with creating debt management plans and contacting creditors.
For more hands-on legal help negotiating and reviewing agreements, debtor-creditor attorneys can take over communications and use their expertise to achieve optimal settlements. Just make sure to clarify their fees upfront so you know the total costs.
While certainly not an easy fix, an out-of-court debt restructuring could offer a lifeline if you genuinely cannot continue making minimum payments. Just be sure to carefully consider all options and get professional support to guide you.
I hope this overview on out-of-court debt restructurings was helpful! Let me know if you have any other questions.