A debt agreement is a contractual arrangement in which one party, a creditor, agrees to work with another party, a debtor, who is unable to meet the previously stipulated obligations of a loan repayment. A debt agreement is sometimes referred to as a right of claim for money against a debtor. Debt arrangements can be either formal or informal.
Debt Basics
Debt is established by contractual arrangements, submissions into public records, judgments of debt by the court, issuance of bonds, and many types of consumer and business loan contracts in which terms of the debt are spelled out in the loan contract, according to The 'Lectric Law Library website's legal definition of debt. In some instances, debt agreements are verbally established between two parties. While usually legally binding, a verbal debt agreement is more difficult to substantiate in court. When you repay your debt in total, your debt is discharged.
Debt Remedy
When a debtor fails to meet his obligations under the contractually agreed upon terms and conditions of a debt agreement, the creditor may seek legal action to recover the debt and any money owed, notes The 'Lectric Law Library. This legal action to recover debt is called a debt remedy. A creditor may take a debtor to court, for instance, and sue for recovery of unpaid debt as well as financing fees, if applicable.
Formal Debt Agreements
Formal debt arrangements are called Part 9 Debt Agreements, according to the Debt Advice website. These are formalized arrangements established between a debtor and his creditors that offer an alternative approach to debt repayment. Added to the bankruptcy act in 1996, these formal agreements are intended to offer both parties a remedy that avoids bankruptcy, where no one would benefit. Often negotiated by a third-party debt solutions company, these formalized contracts help the debtor repay the debt over a longer time frame, or they may reduce the total debt. Creditors do not have to go along with a debt agreement, but may do so to avoid a total loss when a debtor files for bankruptcy.
Informal Debt Agreements
Informal debt agreements are less formalized and are not legally binding. Debtors that have personal loan and credit card obligations that exceed what they can manage may approach a creditor on their own to discuss an informal agreement that either suspends repayment, extends the repayment period, or reduces the debt obligation. The Debt Advice website indicates that creditors often have "hardship departments" that work specifically with debtors on these arrangements. If you lose your job and cannot meet upcoming payment obligations, a creditor may work with you directly to avoid expenses and delays with more formalized debt agreements.
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