The foundation of our debt repayment plan is to take care of our monthly repayment ability. This means ascertaining how much money is left for us after we have deducted our expenses from our total income sources. When our monthly repayment ability is less than our monthly debt payments, we must first act to change our entire debt disposition. This step is called debt settlement.
In order for us to match our monthly repayment ability and the monthly repayment amount needed to repay our debts, we will most likely need to combine a large lump sum of money with smaller amounts of money for monthly payments.
There are a number of ways to plan debt settlements. Each way is different according to the particular family situation and the specific debt settlement.
Here are a few ideas to help you match the monthly payment amount to your repayment ability:
Sources for a large lump sum of money
In order for us to match the monthly repayment amount to our personal monthly repayment ability we will need to use large sums of money at once. This will allow us to reduce the debt balance significantly and considerably shorten the time left to wipe off the entire debt. The possible sources for large lump sums are divided into two circles: the inner circle and the outer circle.
The Inner Circle
The inner circle is money belonging to our nuclear family. This money source is also divided into two types: readily-available money and future money.
- Savings accounts into which we deposit monthly which can be cashed in the near future, including savings for our children. It is worth considering that sometimes putting aside money for our children while we are in debt is not worth it. We should consider using this saved money to repay debts now, and then start saving again in the future. Children’s savings are not taboo.
- Money deducted directly from monthly paycheck, or money the employer allocates to you for future use, such as mature funds you are entitled to withdraw, mature benefit funds, vacation days you are entitled to redeem as cash, and more.
- Cars – consider getting around with only one car instead of two, or possibly no cars at all, at least for a short while. Maybe you can replace an expensive car with a more cost-beneficial and efficient car? It is extremely important to accurately calculate your car expenses, in addition to the purchase cost: gas, parking, insurance, registration, ongoing maintenance.
You can allocate the readily-available money in the above list to start repaying your debts immediately.
Monetary valued assets that can be liquidated (converted to readily-available money) such as:
- Savings accounts and benefits funds that have not matured yet.
- Valuable jewelry, no longer in use.
- House/apartment – check the possibility of reducing living expenses by renting out a portion of it, or even selling it and moving to a smaller place. It is also worthwhile to check out the possibility of moving into rented accommodation. We recognize that these are drastic measures, but sometimes it is best to take proactive steps rather than risk the burden of asset repossession.
- Sometimes you can find funds resources you were unaware of. It is recommended to use the search engine of the Ministry of Finance to find inactive benefits and/or retirement accounts that belong to you or deceased relatives.
Future money can be used to apply for bridging loans against your debts.
It is recommended to prepare a detailed list of all the readily available and future money available to you and examine how it can be used to reduce your total debt amount.
The Outer Circle
Money that does not belong to the nuclear family, such as:
- Money that can be borrowed from extended family and friends, on the basis of your mutual relationships and their financial abilities.
You can ask for a one-time large lump sum or smaller monthly amounts. Repayments will be based on your repayment ability and according to your prearranged agreement.
- Approach your employer for a loan or a bonus.
- Charity organizations and funds, which provide no-interest loans with very flexible and easy repayment terms for those meeting their lending criteria.
Arrangements for loan refinance/restructure or loan consolidation in order to spread the payments at a lower monthly amount. This is possible after negotiating with your creditor.
Monthly repayment ability is 800 Shekels, there are 30 debt payments left at 1,500 Shekels each payment, for a total of 45,000 NIS. It is worth checking out the possibility of refinancing/restructuring the debt to 60 payments of 770 NIS each, to match the monthly repayment amount to your repayment ability. Before refinancing/restructuring the debt you must check if your current loan terms carry a penalty for early repayment. If so, refinance/restructure may not be beneficial.
Negotiation with Creditors/Lenders
You may want to try to spread out your current debt without undergoing official refinance/restructure, or to postpone payments in such a way that will match your personal repayment ability. This option is recommended in cases where monthly repayment ability is expected to grow as a result of another debt settlement, increase in household income, expense reduction, etc. During the negotiation with your creditor/lender you can ask to freeze the ongoing payments for a predetermined time so that your total monthly payment is reduced. This will allow you to pay your debts one after the other.
Be aware that this arrangement can work only for the loaned amount – usually you can’t freeze interest payments.
In most cases, to moderate the creditor/lender demands and to reach a comfortable debt settlement, there is a need to first repay a hefty lump sum. A creditor/lender who sees this as a way to get back a large portion of the debt, may consider positively the option to mutually agree on a comfortable payment settlement, forgive some penalties and possibly even provide large discounts on a portion of the debt. This is true for all kind of creditors/lenders, including banks.
Remember, this is very important: Never commit to a monetary settlement if there is no sure way to source out the amount of money needed. Even if the settlement is very tempting, even if the creditor/lender is willing to wipe out a big percentage of the debt, you cannot agree to it. If you will not be able to make payments on the new settlement then your situation will only get worse.
Applying for a mortgage for any purpose (loan that is not obtained to purchase a house/apartment)
At times, there is a possibility to apply for a mortgage, a long-term loan, for which you put your house/apartment as collateral. These loans are given by mortgage institutions and must meet a number of criteria. The basic one is that the house/apartment is not currently mortgaged. Money from this loan can be used to settle a large number of debts and repay most debts using one settlement source.
As we can see, planning debt settlement is sometimes done by actually borrowing additional money, but this time the purpose of the loan is to exchange one debt with another without increasing the total debt, and on better terms, to improve the ability to repay.
In other words: in the past you used loans to cover ongoing household expenses, whereas here we are dealing with loans that will serve you only for the purpose of settling debts.
Dealing with Creditors/Lenders
If, despite all your efforts, there is not enough money to repay all the debts, there are a number of other options:
- It may be possible to reach a mutual agreement with the creditors/lenders to postpone the settlement date of the debts, or temporarily freeze the payments, while paying only the interest during that time.
- The legal path – ability investigation, files consolidation, “limited means debtor” status and bankruptcy declaration. It is important to note that legal path must be considered a last resort, and only if and when your creditors/lenders have chosen to invoke this path against you. Also, if you must use legal path, it is essential that you first consult with legal professionals. The goal of the information above is to try and avoid the legal path at all costs.
Reaching out creditors/lenders and recovery of trust
It is important to remember that any possible settlement with creditors/lenders is based on their trust in your ability to repay the debt in full, and in your ability to change your ways in order not to accumulate additional debts.
It is absolutely essential to devote maximum efforts to recover trust:
- Even when the cause of debt is payments backlog, you must make every effort to keep paying the ongoing debt, to ease the trust recovery process.
- Your reference point should be that creditors/lenders are not the enemy; therefore, it is important to work with them in a transparent and cooperative way.
Share your economic hardship with the creditors/lenders. Tell them how it came about and emphasize the changes you have taken upon yourself.
Provide information about the number of creditors/lenders and the extent of your debt, expose the overall economic recovery plan you are about to implement, present them with your current repayment ability and update them with the upcoming changes that will improve your monthly repayment ability.
- Stress again and again your intent to fully pay off the debt and the cooperation you need in order to implement this.
Why bother? Certainty, honesty and…. we are all human.
One of the things that makes creditors/lenders use harsh collection means is the uncertainty that their money will be paid back. If you provide them honestly with complete information about your economic situation and your repayment ability, you may get them to realize that they would be better off being more flexible with the settlement terms and adapting to your actual abilities.
Also, disclosing the fact that in the near future there will be a significant improvement in your repayment ability, for example as a result of increasing your income, will give the creditors/lenders an incentive to wait with harsh collection means to allow you more time to get organized on your plan.
Sometimes, creditors’/lenders’ involvement in the situation becomes personal for them, especially if the reason for the debt accumulation was somewhat beyond your control.
Last, but not least
In order not to harm the delicate trust you have rebuilt with the creditors/lenders, it is important that you reach settlements that fit your repayment abilities with all the creditors/lenders and only after you have verified your ability to make that commitment.
To achieve the best result during the negotiation with the creditors/lenders, it is important to conduct it with the right person. For example, negotiate with the bank branch manager and not a clerk. If you know people in high ranking positions at your creditor/lender institutions, this is the time to use your connections.
Debts for which there are underwriters or collateral will require a different negotiation approach in order not to liquidate assets or reach extreme terms with the creditor/lender. Also, debts to various government authorities like VAT and the Income Tax Authority require different arrangements due to their special nature.
If you are unable to repay your debt, or you are having difficulty doing it by yourself, use us.