Sometimes people accumulate high volumes of debt for which they are unable to make timely payments or which they are unable to fully repay. Under such circumstances, many individuals file for bankruptcy protection without considering an alternative course, called debt mediation. Rather than liquidating, or selling off, the entirety of your assets, the process of debt mediation seeks to reduce the total amount of money an individual owes by negotiating with his lenders.
Debt and Bankruptcy
Debt is money that is owed by one party to another in return for a loan. Debt frequently includes mortgages, auto loans, educational loans and credit card balances. As the gap between an individual's total assets and total debt, or liabilities, increases, she may resort to filing for bankruptcy. This is a legal process wherein a court grants special protections from lenders when an individual cannot repay his debts with the value of his assets. If the court determines that bankruptcy protection is warranted, all assets belonging to the individual are liquidated, and the money is used to pay the lenders involved in order of priority.
Bankruptcy and Lenders
The end result of successful bankruptcy proceedings is that the individual's debts are fully forgiven without regard to how much of the original outstanding debt was covered by the liquidation. For lenders, bankruptcy is an additional risk to that of the loans that they originally disbursed. This is because there is a significant chance that a lender will not receive compensation from the liquidation and incur a loss. Debts are prioritized based on the remaining balance and length of time outstanding, so lenders of smaller debts or debts prioritized as less expensive may not receive the compensation they seek when a debtor declares bankruptcy. The chance of such a loss is greater when there are more lenders involved.
Debt Mediation and Service Providers
Debt mediation is an alternative to the bankruptcy process. In debt mediation, a third party typically negotiates with an individual's lenders in an effort to lower the debts to an amount the individual can realistically repay. These third-party negotiators are experienced professionals who represent the borrower to his lenders. This initiates the negotiation process and protects borrowers from any potential hassling and intimidating behavior from lenders.
Time and Results
The time required for a negotiator to reach an agreement with a lender can vary, as volumes of debt and financial stability vary from person to person. For this reason, negotiations may take between several months and a few years depending on the size of the loan and resistance encountered from lenders. Debt mediation can reduce the balance on a debt by up to 60 percent with a lower threshold of roughly 40 percent.
Debt Mediation Benefits
The aim of debt mediation is to reduce the amount owed to a manageable level based on the borrowing individual's financial situation. Debt mediation is preferable to bankruptcy for lenders and borrowers alike. Mediation means borrowers do not have to surrender the entirety of their belongings, and it also ensures that lenders will receive some form of payment rather than risk receiving nothing as part of a priority queue, as with bankruptcy.
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