In this 4-minute read, find out what are debt agreements and how can you avoid defaulting on debt in the first place
Debt can be a good resource when buying a decent house over several years, for example. But debt can also become an increasingly turbulent spell that can stress you out when done wrong. The rule of thumb is to take up debt only when it is the last option. Yet even then, defaulting on a loan can still happen for various reasons. Losing a source of income is the major one. So, what do debt agreements have to do with anything?
What exactly are debt agreements?
A debt agreement is a legally binding agreement between you (borrower/debtor) and your creditors indicating how and how much you are to pay back the debt you owe them over a specific period.
The agreement, made per personal insolvency law, is meant to help a borrower negotiate an amount to pay their creditors over a certain period to avoid the harsher consequences of being declared bankrupt.
How do debt agreements work?
You must meet certain debt agreement criteria (debt and income limits) to enter into one.
Once you do, you hire a licensed debt agreement administrator to negotiate a reduced amount of the total debt that you have to pay.
Your debt agreement administrator then sends out proposals to each debtor, stating the percentage amount of the total debt you are to pay. All creditors receive an equal proportion.
The proposal passes when the majority of creditors agree to your proposal terms. They might not.
Finally, you make payments to your debt agreements administrator to pay each of the creditors on your behalf.
Are debt agreements better than bankruptcy?
A major advantage of choosing debt agreements is you may be allowed to keep your home.
Also, once you pay the amount defined in the debt agreement, you no longer have to pay any more.
What are the consequences of debt agreements?
Keep in mind that proposing a debt agreement is an act of bankruptcy.
Debt agreements are not consolidation loans, either.
And, you may still have to deal with more nagging issues such as:
- You have to reveal the agreement to future creditors—and probably lose chances of getting their credit
- Your name and financial details listed in the public domain for several years
- The agreement will appear in your credit report for several years, too
- Even when you change your business name, you’d still need to disclose your debt agreement to business partners
How to avoid unnecessary debt traps: 6 tips
Here are straightforward ways to avoid debt default traps.
- Remind yourself living in debt is not normal and don’t borrow to buy what you can’t afford to impress family, friends, and colleagues
- Keep the least number of credit cards, don’t lend it out to others, know it’s terms and conditions, pay due amounts in full, and only use the cards to buy needs—not wants
- Create an emergency fund to eliminate using credit cards or expensive short-term loans for emergencies
- Only take 36-month auto loans. Not more time
- Watch out for sneaky, “affordable” subscription services that, combined, really add up
- Seek professional financial help to guide you through concerns
Should you use a professional debt compliance service?
Without working with an expert debt compliance service provider or administrator, you might find the creditors can take the proposal and produce it in a U.S. court of law to make you bankrupt.
Ensure you only work with debt agreements professionals that have a proven track record of delivering satisfactory results for previous clients.
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