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Creditors can help tweak debt terms, since the alternative is to write the debt off as a loss. Picture used for illustrative purposes. Image Credit: Supplied

Dubai: If a debt collector or creditor is calling about a loan or credit balance you can’t pay in full, contrary to common belief, you may find that a creditor or collector may still be willing to negotiate.

Debt collectors don’t need to recoup the full amount you owe to reap a profit. As such, there’s a chance one may agree to a settlement. Creditors may be willing to reach an agreement, since the alternative is to write the debt off as a loss.

You may not be allowed to travel outside the UAE if you default on repayment of the personal loans or credit card instalments. Furthermore, the lending bank or financial institution may file a civil case against you, based on the personal loan agreement you signed, to recover the outstanding debt.

Do all creditors consider settlement?

Many creditors will not consider settlement until your debts are at least 60-90 days delinquent (inability to pay). You’ll have a better chance of settling a debt with the original creditor that is around five months delinquent, which is the time many creditors will sell the debt to a third-party debt collector.

While negotiating a debt settlement on your own is not easy, it can save you time and money compared with hiring a debt settlement company.

There are some best practices when it comes to debt negotiation, including explaining your current money situation and obtaining written confirmation of any settlement you do reach. But here are some pointers for negotiating with creditors or lenders.

How do you negotiate with your lender?

One of the many ways to get control of debt is to negotiate with creditors to lower the overall amount due. When successful, debt negotiation might be an option for avoiding bank levies, foreclosure, and bankruptcy.

You’ll probably want to consider using the threat of bankruptcy to your finances as a negotiation tactic, aim to settle your unsecured debts for 50 per cent or less or furnish proof of having money readily available to make payments soon.

Sometimes your negotiation strategy will depend on the type of underlying debt. Negotiating with credit card companies, for example, generally requires different tactics than dealing with a mortgage lender.

Common debt negotiation strategies

If you have a massive amount of unsecured debt that you could get discharged (eliminated), bankruptcy is an option you probably should consider. While you may panic of how your credit will take a major hit, it may help to know that your credit is already significantly damaged by your missed debt payments.

According to the latest amendments to the UAE financial insolvency law, the court will appoint an expert to deal with debt processing. The expert, in coordination with the debtor and their creditors, will devise a debt settlement plan that does not exceed three years.

Once the plan is finalised, all financial obligations will be fulfilled according to the agreed upon terms. However, the debtor is not allowed to take any further loans, unless the court decides so, in adherence to a request from the debtor, creditor or the appointed expert.

How knowing the workings of bankruptcy can help negotiate
The most common types of bankruptcy cases that people file are filings wherein the entire amount owed to the average unsecured creditor is discharged – meaning most unsecured creditors get nothing.

Unsecured creditors, like credit card companies, know this, and most would rather settle the debt than wind up with nothing if you file for bankruptcy protection.

Aim to pay 50 per cent or less of your unsecured debt

Ideally, you should be willing to meet the bank half way to arrive at some sort of realistic settlement. So if you decide to try to settle your unsecured debts, aim to pay 50 per cent or less.

It might take some time to get to this point, but most unsecured creditors will agree to take around 30 per cent to 50 per cent of the debt. So, financial planners advise starting with a lower offer – about 15 per cent - and negotiate from there.

What if you don’t have 50 per cent of the debt to settle?

Let’s say you are unable to furnish that much money and you don’t currently have a job.

What you could then do is offer to use whatever funds you have to partially pay off the loan, and request to be offered an affordable repayment plan for the remainder of the amount once you find a job. Once a solution is reached, you must obtain written proof of the withdrawn police complaint from the bank.

Is there an alternative? The alternative and more financially sound solution is to pay off and close your credit card debts first.

Your credit card debt is going to multiply faster than your personal loan, considering the high interest rates on credit cards in the UAE. Given the amount you owe on your credit cards, reaching a settlement within the amount you have raised so far may be a realistic possibility.

Have some cash in hand? Use it as leverage in negotiations

Creditors are more likely to settle if you can transfer the pay-off funds right away. Some creditors will want a lump-sum payment, while others will accept payment plans. Regardless, you need to have the cash to back up any settlement agreement.

If you amass a sum of money before negotiations and then offer to send the money immediately to the creditor, you’re more likely to get a lower settlement. This is because creditors are more willing to take an offer of cash today rather than have to wait for multiple smaller payments over time.

After several negotiations, you might be able to settle some – but not all – of your debts. While your goal in the dealings should be to wipe out all of your unsecured debts, if that isn’t an option, try to eliminate enough debt so you can pay off the remaining amounts in a reasonable amount of time.

Ensure clarity on your terms of debt settlement

You need to negotiate two things: How much you can pay and how it’ll be reported on your credit reports. For payment, you may be able to settle your debts for 40 per cent to 50 per cent of what you originally owed.

While you’re technically working to settle your debt as a percentage of what you owed, also think about how much you can pay as a concrete dirham amount. Comb through your budget and determine what that figure is.

As for your credit, it probably has a lot of delinquent ‘unpaid’ marks from missed payments by the time you’re eligible to settle. But financial planners add that it you may slightly help your case by knowing how the settled debt is noted on your credit reports.

Settled debts are generally marked as ‘settled’ or ‘paid settled’, which doesn’t look great on credit reports. Instead, you'll try to get your creditor to mark the settled account ‘paid as agreed’ to minimise the damage.