When you feel like you are drowning in debt, whether you are a business or in your personal life, you might make a compromise with a creditor. This means that you come up with an agreement to pay back a lesser amount than what you owe. When a creditor feels that getting paid in full is incredibly unlikely. Nice the portion of the debt that has been agreed upon has been paid, the debt is considered paid in full. Principle Insolvency is here to take a closer look at the process of a creditor compromise.
How a Compromise Works
There are a few steps when it comes to getting a compromise moving forward. Here are the steps to get the process started:
– Assessment: The debtor will need to take a close look at their financial situation to get started. Come up with a realistic payment plan. This is usually handled best with the help of a professional.
– Draft Proposal: The financial advisor the debtor is working with will help them come up with proposal that outlines clearly a detailed amount, timeline and terms.
– Creditor Approval: The creditor will have ample time to review the proposal and decide whether or not the terms are going to work for them. A majority will need to agree to the terms and then all creditors will be bonded by contract.
– Legally Binding Agreement: When the creditors have accepted the compromise, it is then drafted in a legally binding agreement. The creditors will not be allowed to pursue the remaining debt as long as the debtor upholds their end of the contract.
Types of Creditor Compromises
When it comes to a creditor compromise, there is more than one option to choose from. Here are the main types in New Zealand:
– Lump-Sum Payment Compromise: In this agreement, the debtor will make a one time payment to creditors to settle the debt all at once.
– Payment Plan Compromise: If this is the agreement that has been chosen, the debtor will commit to making a certain number of payments over a period of time.
– Hybrid Compromise: This takes the best of both worlds with the debtor paying a lump sum at the beginning and the remaining balance will be paid over the span of several months until the agreed amount has been met.
Drawbacks of a Compromise
There are a few drawbacks that come with a creditor compromise. The biggest one being a hit on your credit. Your credit score will certainly be lower after a compromise. Another drawback is that creditors might turn down your agreement if they doubt that you will hold up your end of the deal.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If you are in financial trouble as an individual or a business, you can turn to Principle Insolvency to lay out your options and help you move forward. Call us today!