This article is written by Vikas Kalias Patil who is pursuing a Certificate course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

COVID-19 : a blow to already fragile global economy

COVID-19 has acted as a catalyst for already debt ridden global economy. Complete lockdown in different parts of world have disrupted the entire supply chain and many businesses have suffered the heat of such decision. The formal as well as informal economy have suffered to a great extent due to this COVID 19 outbreak. The past decade has seen the largest, fastest, and most broad-based increase in debt in developing economies in the past 50 years. Since 2010, their total debt rose by 60 percentage points of GDP to a historic peak of more than 170 percent of GDP in 2019. Emerging markets and developing economies had already been struggling with volatility during the current wave of debt accumulation, but widespread and severe financial stress emerged after the COVID-19 pandemic hit. 

This condition has led to many of the private businesses to suffer from fund crisis and are facing issues to repay the borrowed money. This has led to large number of defaulted payment cases all over the world. To resolve these matters related to debt, arbitration may provide the best solution which may be acceptable to both parties.

Debt arbitration a possible solution to current problem

Debt arbitration is the process of helping the parties that owe or are owed money to find an acceptable payment scheme for paying back the debt. For creditors, debt arbitration makes it possible to recover maximum amount owned than possible by filing a suit against debtor.

Why Creditors Will Choose to Settle

The question which may arise in anybody’s mind is, why will anyone choose to settle at a lower amount than they need to recover? This is mainly because they want to recover what they have lost in form of loan given, without tarnishing the relationship between the parties. They want to avoid bankruptcy as much as the indebted party wants to avoid it. Instead of receiving nothing, they will mostly likely be inclined to accept a lower payment amount. Even if that means reducing a certain percentage of the original debt amount, it is still more appealing than not being paid at all.

If the indebted is forced to declare bankruptcy after a court hearing, lender’s chances of getting paid is reduced. The costs to hire a lawyer and the other fees associated in court further add up the cost. If the creditor agrees to help in such difficult time it would help him retain a customer for future business. 

Players in such arbitration process

A firm or consultancy that administers the arbitration process is called a “forum” or “provider.” A person whose job is to solve financial problems between companies by helping them make new arrangements for paying back a debt is called as debt arbitrator. These firms appoints the arbitrators, schedules the hearings and phone calls, and manages the flow of information between the parties and the arbitrator until the dispute is resolved. These consultants and their employees must be fair and impartial. 

How does arbitration work?

When a money lender wants to recover the money from debtor, he will send a notice through any mail or delivery system to begin arbitration proceedings. If the debtor don’t reply to notice or recognize the debt, he must contact the creditor or call forum for more information.  If the name of debt collector don’t appear familiar then it is always recommended to contact creditor directly. 

once the arbitration proceedings start both the parties should thoroughly go through the claims made by each of the parties. All the documents are sent by certified mail and a receipt is given as a proof for receival of documents and their submission date.

At the hearing, each party has a chance to explain its side of the dispute to the arbitrator. The arbitrator considers each side’s evidence and submissions and then makes a decision. The arbitrator’s decision is binding even if you don’t participate in the process.

Lender-Initiated Debt Arbitration

Lender initiated arbitration are found to be more successful than debtor initiated arbitration, as lender is having a stronger position throughout the transaction. Lenders always try to recover bad debt as soon as possible without higher recovery cost. If the agreement consist of arbitration clause then it is necessary to arbitrate but even if arbitration clause is not present, arbitration is preferable because of following reasons

• As it is outside court settlement, it saves time and efforts.
• It does not involve hassles and tedious process which is involved in litigation.
• Arbitration involves much lesser recovery cost and it also paves a way for future transactions. 

Lender initiated debt arbitration involves sending of notice to debtor for arbitration process. This notice is in written format and mostly sent through mail. Unlike other method of recovery, in this mode of recovery the problems of debtors are thoroughly studied by the forum and suitable payment schedule is made. These payment schedules are made such that both lender as well as debtor are taken care of. The lenders are not benefitted by making their lender bankrupt, instead if they make sure that the debtor’s instalments be revised then it will benefit both the parties. Even if the lender gives some relief to debtor it would not substantially affect the lender, but it would definitely set in motion the pending transactions and it would also save a lot of legal expenses. 

Once the debt collector or lender begins the process it must not be ignored. If the arbitration proceedings are not attended by debtor then it would go against him as he would not be able to narrate his conditions and demands. 

Consequences of arbitration

The arbitration award is final and binding on both the parties. When the arbitrator issues an award in favour of lender, the debt collector should go to court and ask the court to give it a confirmation so as to give it a status of court judgement.  The court judgment can be used to collect money from debtor. The court may give an order to attach debtors assets and would give lender the right to withdraw the money from the debtor’s seized accounts and assets. Certain type of funds cannot be attached such as federal benefits .

The debtor is left with limited ways to challenge if he disagrees with the award. If he disagree with the award, he have two options: he can challenge the collector’s request if the court is yet to confirm this award or he can go to court to contest the award. Either way, he have a limited number of reasons for challenging the award, like arbitrator misconduct, and you may have a short period of time to do so. The debtor might consult with a lawyer for more information about challenging an award.

Arbitration proceeding have a negative impact on credit score and report. This will lay a hurdle for securing loans in future.

Debtor-Initiated Arbitration

The arbitration initiated by debtor is also known as debt settlement, debt negotiation or credit settlement. In this type of arbitration the debtor try to renegotiate final amount payable to lender i.e. try to bring down the final amount payable 

This concept may sound very lucrative but it have its downside too

• Even though the debt negotiating companies may bring down the final settlement amount, it severely affects the credit rating and would be lasting for next 7 years as applicable for bankruptcy.
• The IRS may regard the forgiven debt as income and may lead to extra taxation.

One more aspect to such arbitration is that the legal consultant during the process may ask the debtor to stop making payment to lender. Late payments, interest, and penalties may pile up while the legal expenses continue to incur.  

According to a 2015 report by the Consumer Financial Protection Bureau, debtor-initiated arbitration rarely turns out well, particularly for debtors who represent.

Reasons to hire debt negotiator

While one may have the guts to go about this on his own, it is rarely advised. A trained professional is needed to make sure you are given the right settlement deals by your creditors. Even if the debtor may know his finances well, a debt negotiator is trained to negotiate with creditors to arrive at agreeable solution which would be beneficial for both parties. A debt arbitrator can also do more than just get your debts lowered. They can help identify points in your financial life that you may need to reconsider in order to correct bad spending habits.

Parameters to select arbitrator

Impartiality is the most important parameter which need to be taken care of while appointing an arbitration forum or arbitrator. In addition, the forum should also follow and enforce ethical standards throughout the arbitration process. It should be ensured that the cost of arbitration proceedings are affordable. The forum should explain various legal provisions used for application to case facts. The process of arbitration should be transparent and in understandable manner.

Conclusion

COVID-19 have given one of the worst hit to global economies, specially the developing economies. Many businesses are struggling to survive just because of the lockdown. Although many banks observed standstill in debt collection and bankruptcy proceedings by extending the tenure of debt collection, it is impossible to recover the business just by implementing these steps. These steps taken do not apply to urgent proceedings such as interim measures and freezing orders. Delays are to be expected in most court and arbitration proceedings due to the current unprecedented situation. These solutions coupled with arbitration will be the best solution for current problems faced by businesses. These arbitration should have an equal support from lender as well as debtor so as to make it applicable in better ways. 

References

• https://www.debt.org/credit/collection-agencies/arbitration/
• https://www.imf.org/external/pubs/ft/fandd/2020/06/COVID19-and-debt-in-developing-economies-kose.htm
• https://www.consumer.ftc.gov/articles/0161-debt-collection-arbitration
• https://dictionary.cambridge.org/dictionary/english/debt-arbitrator
• https://www.nationaldebtrelief.com/debtresources/debtarbitration/
• https://www.nationaldebtrelief.com/avoidbankruptcy/

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