The basis for debt repayments is handlingthe monthly repayment capacity, i.e., how much money we have left after subtracting expenses from income. When the monthly repayment capacity is lower than the monthly debt repayment amount, action should be taken to change the debt system. Such a move is called: debt settlement.
In order to be able to match the monthly repayment capacity with the amount of monthly repayment required to make it possible to repay the debts, we will usually need to use large amounts required at once and smaller amounts for monthly payments.
There are several ways to plan the settlement of debts. Not every way is suitable for every family and every debt settlement. It is usually necessary to combine several ways and sometimes legal relief must be sought through legal proceedings.
Here are some ways you can adjust your monthly repayment to your payback capacity.
1. Raisinga large sum ofmoney
In order to adjust the amount of the monthly repayment to the personal repayment capacity, large sums of money must be used at once. In this way, it will be possible to significantly reduce the balance of the debt and greatly shorten the time remaining until the entire debt is liquidated. The possibilities of raising large sums of money are divided into two circles: an inner circle and an outer circle.
The Inner Circle
The inner circle is money that belongs to the nuclear family. This money is also divided into two types: liquid money and future money.
- Savings for which we set aside amounts each month that can be redeemed in the short term, including savings for the children. It is worth checking carefully: sometimes saving for children in debt distress does not pay off and you should consider using these savings funds to close debts now, and return to saving in the future. Saving for children is not a sacred cow.
- Money that comes directly from your salary or that the employer sets aside for you, such as: study funds that have reached the date of eligibility, veteran provident funds, vacation days that you are entitled to cash out, and more.
- Car – Maybe you can get by with one car instead of two or no car at all, at least for a while. Perhaps it is possible to replace an expensive car with a cheaper one. It is important to make an accurate calculation of the expenses of maintaining the vehicle beyond its purchase (fuel, parking, insurance, testing, treatments, repairs).
The liquid money on the list can be used immediately to handle debts.
Assets with monetary value that can be realized (turned into liquid money). For example:
- Savings plans and study funds that have not yet reached the date of eligibility for withdrawal.
- Unused gold jewelry.
- Apartment – Check whether it is possible to reduce housing expenses by renting part of the apartment or selling it and moving to a cheaper apartment. Moving to rented accommodation is also an option that should be explored. These are indeed very significant steps, but sometimes it is better to take them early and on a personal and family initiative rather than bear the consequences of asset foreclosure.
- Many times you will discover financial sources that you were not aware of. It is highly recommended to usethe Ministry of Finance’s locator engine to locate inactive accounts of provident funds or study funds belonging to you or deceased relatives.
The future money can be used to get a bridge loan against the debts.
It is recommended to make an accurate list of all current (liquid) and future money available to you and check how you can reduce the amount of debt with their help.
Money that does not belong to the nuclear family, for example:
- Money that may be available from the wider family and friends based on the nature of the mutual relationship and according to their financial capabilities. You can request a loan of a large lump sum or smaller amounts each month and the repayment will be according to your repayment ability and according to a pre-agreement.
- Raising a loan or grant from the employer.
- Foundations and charitable bodies, charities, that give interest-free loans on favorable terms for those who meet the criteria they set.
2. Debt refinancing
Loan refinancing or consolidation, and spreading the payments with a lower monthly repayment. These actions are carried out after conducting negotiations with the creditor. For example:
The monthly repayment capacity is NIS 800, the debt has 30 payments remaining in the amount of NIS 1,500 each, for a total of NIS 45,000. You can check the possibility of refinancing the debt into 60 payments of NIS 770 each, in order to adjust the monthly repayment amount to your repayment ability. Before refinancing the debt, be sure to check whether according to the terms of the original loan you have to pay an early repayment fee. It is necessary to calculate whether, in such a situation, the refinancing of debt is worthwhile.
You can try to reach a new spread of your existing debt without refinancing, or to defer payments in a way that suits your personal repayment ability. This activity is recommended in cases where the monthly repayment power is expected to increase following the completion of payments for another debt, an increase in family income, a reduction in expenses, etc. In negotiations with the creditor, you can request to freeze the current payments for a certain period (only for the principal, usually it is not possible to freeze the interest payment) and thus the monthly payment will be reduced and the debts can be paid one by one.
Most often, in order to moderate the creditor’s requirements and reach a convenient debt settlement, it is necessary to return a large amount of money at once. A creditor who sees a way to immediately receive a large part of the debt will positively consider the possibility of reaching a convenient payment arrangement, forgiving various fines and even giving substantial discounts on part of the debt (this is true for all types of creditors, including banks).
It is very important to remember: one should nevercommit to a financial arrangementif there is no certain way to raise the amount of money necessary to meet it. If you can’t comply with the new arrangement, the situation will only get worse.
4. Application for mortgage for anypurpose (loan not intended for the purchase of a house).
Sometimes it is possible to get a mortgage, a long-term loan, in return for which the house is mortgaged. These loans are granted at the mortgage bank and must meet a number of criteria, the most basic of which is that the house is not mortgaged to a previous loan. With the money provided by this loan, it is possible to settle many debts and in this way repay most of the debts from one source of repayment.
As we have seen, debt restructuring is sometimes done by borrowing additional sums of money, but this time The purpose of the loan isthe replacementofone debt withanotherwithoutincreasingthetotaldebt, andon bettertermsso that refunds can bemet.
In other words, in the past, the loans you took out were also used to cover current consumption, while here we deal with loans that will be used only to handle debts and settle them.
In order not to once again sabotage the creditors’ delicate trust in you, it is important that you reach arrangements with all the creditors that are tailored to your repayment ability and after you have verified that you are able to meet them. To reach the best result in negotiations with creditors, it is important to conduct it with the right person. With the collection center at the bank and not with the branch employees. If you know people in key positions with the private creditor, it’s time to get help.
Creditor debts for which there is collateral, such as guarantors or neighborhoods, will require a different approach to negotiating so as not to cause the realization of the collateral or to radicalize the creditor’s position. Obligations to the various authorities, such as VAT and income tax, also require a different method of handling in light of the sensitivity involved in them.
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Note: The guide does not deal with debts in execution, bankruptcy, and grey market debt. These obligations are obligations in every respect and of course they must be addressed. However, due to their great complexity and their broad implications, they should be dealt with in a special way through personal guidance and advice from professionals in the field, and we will not deal with them within the framework of the current guide. The purpose of this guide is to help as much as possible from deteriorating debts into legal obligations such as bankruptcy, knowing full well that handling a debt before it becomes a legal debt is usually simpler and mostly cheaper.