Sometimes, a person who has borrowed a loan is unable to repay the said amount in the stipulated time and runs the risk of a default. At such times, negotiating with the lender or creditor can benefit a borrower immensely. In order to negotiate or renegotiate the amount or the rate of interest or the time period, a letter is written by the borrower to the lender. This is called the debt settlement letter (or debt arbitration/debt negotiation letter).
Earlier, a debt settlement was a clause that signified a full payment by the borrower of the sum agreed upon in the contents of a negotiable instrument. This process can also be initiated as a part of debt management and credit counseling services. One must note that these types of settlements were always done in accordance with a negotiable instrument. In short, the concept refers to a negotiation between the borrower and creditor.
Nowadays, however, the concept has attained a much wider meaning and scope, as the concept is being slowly introduced into the market that provides credit creation facilities for individuals. The process usually takes place in a situation where the borrower is unable to repay the lender (creditor). In such circumstances, the lender and the borrower reach some kind of agreement, which is termed as a debt settlement.
A negotiation letter can be written to the following types of creditors/lenders/credit creation companies.
- Credit card companies require a settlement letter
- Business creditors, from whom you have availed goods and services but not paid that appropriate consideration
- Lending Institutions
Debt Settlement Terms
This letter usually documents the terms and conditions that the borrower can financially comply with. The creditor usually accepts the terms, as the recovery of the maximum possible amount that has been lent is possible. In the process, the parties accept to sustain losses, equally (in most of the cases). In cases of very huge debts where that amount is secured and the collateral has a very high liquidation value, people tend to take help from agencies, companies, and lawyers in order to conduct the process. Same is the case for companies and large organizations.
The terms are usually as follows.
|Terms According to Settlement||Party at Loss||Actual Effect of the Terms|
|Reduction in Rate of Interest||Creditor||A reduced rate of interest enables the borrower to pay off the amount quickly. However, the creditor sustains the loss of reduced interest to quickly recover as much as possible.|
|Increase in the rate of interest||Borrower||The rate of interest is usually increased by the creditor when the borrower requests a substantial extension of time period for an unsecured amount.|
|Decrease in time period||Borrower||The terms of decrease in the time period is usually put forth by the creditor when the borrower demands a decrease in the rate of interest|
|Increase in the Time Period||Both Parties||The increase in the time period is not very beneficial for both the parties as the time period of the amount is increased, and the amount of installment and interest gets distributed over a long period of time. This clause is rather risky for the creditor, and as for the borrower, he has to pledge a collateral, and the increase in the time period has a negative effect on the credit rating.|
These are some of the basic terms and conditions that are usually put forth in most of the negotiation letters. One must note that, during the process of negotiation, the creditor and the borrower have to sustain losses. Hence, the party proposing the clause, has to comply with other terms that are proposed by the other party. Be sure to use some very good management strategies and programs, so you do not end up sustaining huge losses.
The following is a sample that you can use to put forth some appropriate, fair terms and conditions in front of the creditor. Remember to be rational and fair, as it signifies the understanding of your economic position. When you request for something, be sure that you promise something in return. You may also refer to the terms and conditions written in the aforementioned table.
Account Number/Credit Card Number:
Name of Creditor:
Re: Account Number
After providing our acceptance to the above agreement, my financial condition and status of assets and liabilities has drastically changed.
According to the agreement I was supposed to pay a periodic installment of (1)_________ along with an interest of (2)________ every week/month/year for (3)___ weeks/months/years.
Due to the drastic negative projection of my financial status, I would be unable to pay you the promised periodic installment. Hence, according to the pro-rata calculation I humbly request you to accept a reduced installment of (4)______.
I would request you to accept these terms and conditions in order to authenticate the reduced installment proposal.
In circumstances where my financial should condition improve, I shall immediately get in touch with you, in order to recommence the initial format of installments. For your record, I have also enclosed a copy of my credit rating, personal budget sheet, and pro-data calculation.
I sincerely thank you for the tolerance and patience that you have shown. I am also extremely sorry for the difficulties that have been caused.
Waiting for your reply.
(your name and signature)
- State the initial amount of installment that you were supposed to pay
- State the amount of interest that was agreed upon
- State the time period of the loan in terms of weeks, months or years
- State the new amount of installment that you wish to propose
At times, as a part of these letters, you would find that the borrowers request the creditors to wipe off their previous record for late payments, in return of a full repayment, which is instant or extremely speedy.
Tips for Writing
- Confirmation: The first step is to confirm many factors that are associated with the amount. You have to basically confirm the total amount, the amount that you have already paid back, and the amount that is due. Another very important thing that you must consider is the time period remaining. In many cases, people tend to get confused about the rate of interest and the time period, thereby setting off alarm bells, which is quite unnecessary. Verify all these facts with the creditor before you put down the terms and conditions in the negotiation letter.
- Credit Rating: If you are proposing a quick repayment in total then you can also request the creditors to improve your credit rating and erase the late payment records.
- Three Dimensions of Repayment: Consider your financial situation and then propose the best possible 3 dimensions of the credit facility: time period, rate of interest, and the best possible periodic installment. To get the best ratios for the 3 dimensions, you can also consider relief options.
Another very good option is to resort to relief services and agencies in order to get an idea of consolidation and assistance. Some governments also provide relief grants, which one can easily avail.