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Debt Handling-The Benefits Of Individual Voluntary Agreements For Creditors And Debtors

There are times when a debtor and creditor work together to negotiate an alteration in the terms of a debt or a repayment plan. In the UK, this is called an Individual Voluntary Agreement (IVA).

There is no formal name for the process in the US, but it works in the same way. These agreements allow a debtor and creditor to come up with a plan for the repayment of an overdue debt which the debtor would be unable to repay under the current terms.

In the UK, there is a formal structure in place for the negotiation of these agreements, which are typically done in consultation with a Licensed Insolvency Practitioner. While there isn't such a profession in the US, the same role is played by financial advisers, attorneys and debt counselors in negotiating these arrangements.

Since it's a compromise, the agreement is never completely satisfactory to the creditor or the debtor. However, these agreements are a worthwhile settlement for both parties.

The debtor is usually forgiven a portion of the debt or receives more tenable payment terms and the creditor receives some payment instead of none, which is what they would otherwise receive in many cases. Each arrangement has different terms, depending on the needs of each party.

The debtor, for their part is insulated from having property seized, wages garnished and other legal consequences. Since the arrangement will include payment terms which are feasible for the debtor, they can go a long way towards easing the mental and emotional strain of dealing with debt.

It's something which can take an impossible burden of debt and turn it into a financial obligation which the debtor can meet – giving him or her some light at the end of the tunnel.

The creditor also benefits; while they won't normally receive payment for the entirety of the debt, they can sometimes produce more money in the long run by extending the life of the debt. Even at a lower interest rate, these arrangements can be profitable for the creditor.

Even when this is not the case, the creditor receives some payment - and compared to the debtor filing for bankruptcy, the creditor still comes away with something. Debts are often renegotiated to 50-75% of their original amounts.

It's far from ideal for the creditor, but when the alternative is getting nothing as a result of a bankruptcy proceeding, the creditor will usually be satisfied to receive what the debtor can afford to pay.

The debtor likewise can avoid bankruptcy, which is not something anyone looks forward to having to do. Although it can eliminate debts, a bankruptcy ruins ones credit for as long as ten years; so any arrangement which allows the debtor to do their best to repay without having to resort to this drastic measure is more than welcome.

A bankruptcy can make it difficult if not impossible to obtain new lines of credit for the next decade. Home and auto loans will be next to impossible to secure and when it comes to credit cards, only those with exorbitant interest rates will be available.

The kind of damage which a bankruptcy can do to your credit makes nearly every aspect of your life difficult - so it's always better to negotiate a solution than to file for bankruptcy protection.

IVAs are agreements made through the court system in the UK and follow a formal procedure. However, the same sort of agreements can be made in the US with simply a signed document between the parties.

These agreements should always be made in writing to ensure that the agreement is legally binding and protects the interests of creditor and debtor alike.