This article is written by Puhumi Aditya, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com. 

Introduction

The COVID-19 pandemic has caused financial burden to a lot of people. Many of the well performing businessmen had to run for credits or had to shut down because of being unable to pay back outstanding debts. People from all walks of life are struggling financially. At these times debts are causing unwanted problems for even well to do families. Debt arbitration can be proved extremely helpful by settling a lower payable amount for the borrower and can keep them going, on the other hand can fetch back money spent by lenders and save them in the market. Let us learn about the concept of debt arbitration: 

What do you mean by debt arbitration?

Arbitration is the process of amicably resolving commercial disputes with the help of a neutral third party without knocking the doors of law court. The Arbitrator is chosen by parties with mutual consent. Another way of arbitrating disputes is institutional arbitration, where parties submit their dispute to a certain institution which provides arbitrators and facilities for further process. 

Debt is also a commercial matter involving two or more parties, the creditor, who lends money and the debtor, who borrows the money. Arbitration is opted in debt matters to reach a compromise where the defaulter is unable to pay full amount and interests. Debt settlement is also called debt reduction, debt negotiation or debt resolution. Commonly, creditors agree to forgive a large part of the debt: perhaps around half, though results can vary widely. It is common that the debtor makes one lump-sum payment in exchange for the creditor agreeing that the debt is now cancelled and the matter closed. Normally only unsecured loans such as medical bills, credit card bills can be settled through this process.

In case of a dispute, the standard resolution mechanism adopted by financial institutes in India is litigation. This means that if a borrower is unable to pay their debts due to job loss or irresponsible financial handling, the creditor will be forced to take drastic measures to get them to pay. In the beginning, they will pester you with collection letters and follow up phone calls. If you still refuse to pay, they may be forced to sue you in court. However this process may take really long time to settle and also a good amount of money is spent for hearing and as lawyer’s fee. Both of which are saved in case of debt arbitration. On the upper hand, this process is much more comfortable and flexible.

Lender initiated v. debtor initiated arbitration

Lenders initiate debt arbitration when they are of the view that the borrower may file for bankruptcy which will mean that they won’t ever be able to recover their money. Therefore, they agree to settle for a lower amount than the actual because something is still better than nothing.

Debtors initiate debt arbitration when it becomes almost impossible for them to pay back the loan and they want to settle the contract by paying up the amount possible for them. 

How does debt collection arbitration work?

If a debt collector wants to begin an arbitration proceeding against the debtor, he/she may send them an arbitration notice in mail or through any courier service. If the other party doesn’t understand what it’s all about, they can definitely call the collector or the arbitrator to know what it is all about. Since, often it’s not the original creditor who sends the notice, other parties may get confused. In such a situation they can also get help from their lawyer.There are some ‘protocols’ or ‘procedures’ that govern the debt arbitration process. Things such as deadlines, obligations, and fees fall under these. Though these are all available in detail in the website of the forum, one can also ask their case manager for a copy. Also ask for a ‘fee schedule’, which details what fees each party must pay. If you are unable to bear your part, you may also ask for a fee waiver. Ask the forum to know how to apply for fee waivers.

The mediator, company, or attorney that you use for this program will try to get a portion of your debt eliminated. In addition, they will seek to waive fees, lower or eliminate any special expenses and charges, and reduce interest rates.

In addition, the arbitrator should keep the credit report and score in mind. For example, they should closely review the credit ratings to ensure they do not go even lower. The arbitrator should go with the goal of improving your scores and credit report. They need to work to correct any false or negative information on your report that may have been filed with credit bureaus.

Another question to follow is why the creditor will choose to settle for a lower amount than the actual higher sum. Debt arbitration is a better option of creditors also because this is the way they can ensure to regain money lost from their loan and avoid the borrower filing for bankruptcy. In case the borrower files for bankruptcy, the lender will not get anything, therefore instead of losing the full amount, lenders are comfortable with settling for less. Also if a creditor agrees to lower the debt, they retain their customer as the relation between the creditor and debtor is preserved. They save loosing a client. 

How to hire a debt arbitrator and how does the arbitrator help in eliminating debts

People may choose to present their matter themselves, however that is rarely advised. A trained professional is much sought for to make sure that arties get right settlement deals. Debt arbitrators are trained to negotiate with creditors to arrive at an amicable agreement that is suitable to both the parties. Debt arbitrators can do more than lowering the amount payable. They can help identify points in the financial life that may be considered to correct bad financial habits. 

The arbitrator you may choose to work with, whether an attorney, mediator or another professional, will work closely with the consumer and his or her creditors to negotiate the solution or assistance program. The parties will develop a repayment schedule that is agreeable to everyone involved in the program. But the solution agreed to may vary widely. The goal of the lawyer or arbitrator is to find a debt settlement agreement as well as a related schedule that works for the borrower and the lender. Once everything has been agreed to, all that is needed to do is to make the prescribed monthly payments, live within your means, keep up good spending habits and you’ll be back on your way to financial freedom as well as long term self-sufficiency.

Conclusion

Debt arbitration is a very new and innovative concept to settle debt related issues amicably between the parties without resorting to lengthy court proceedings. There are two parties namely, creditor and debtor. The debtor has been unable to pay up the sum of debt that has been outstanding to him for a long time. Therefore they choose to go for an arbitration where the arbitrator settles their dispute by negotiating an amount lower than the actual amount. In this way both the parties are at benefit because it saves debtor from paying full amount and the creditor from losing the full amount. And it also saves both of them from straining their commercial relationship forever.

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