Debt Mediation vs Credit RepairJohn Dickinson, DebtX
There seems to be a lot of confusion around the differences between debt mediation and credit repair so I thought it would be a good idea to clear this up once and for all.
Perhaps some of the misunderstanding comes from people thinking that if an account is paid or settled, a default that relates to that debt will be removed but sadly this is seldom the case.
It’s important to understand a default and the debt that relates to that default are two different things. According to Equifax a default can only be removed if the credit provider has made a fault or error with the listing process. This means that in most cases a credit provider will not agree to remove a negative listing based solely on the resolution of the account.
From our standpoint, debt mediation means to negotiate with a credit provider with the purpose of lowering an account balance so it can be settled via a lump sum payment. Credit repair is just that, to repair a credit file by removing negative listings such as payment defaults. While many people think a default and the debt related to that default are one and the same, the fact is they’re not and the process required to resolve each issue is different.
Now that we’ve cleared that up, let’s look at why debt mediation can be of interest to brokers.
“The key to effective debt negotiation is to point out why it’s a good idea for the creditor to accept less now rather than continue to push for the full balance.”
It’s a common problem for a loan not to be able to proceed due to a shortfall. This can happen for a number of reasons, however poor valuations and changes to lending policy are the main culprits.
Regardless of the reason, shortfalls can leave everyone involved in a tough spot; the broker may have spent many hours getting the transaction to this stage and the client had been relying on the new loan to get back on their feet. This situation can result in an unhappy client and they’ll often blame the broker for things not going to plan, even though it wasn’t the broker’s fault.
In many cases the debts people are wishing to retire are facilities such as credit cards and personal loans. Creditors can be very fast to approve these types of loans (perhaps too fast in some cases) as they represent a high level of return. However, given they are unsecured, these debts also represent a high level of risk to the creditor which is why a creditor will often agree to reduce an account balance to resolve what is or could be a problem account.
While credit providers would always prefer to get all their money, they know that it can be better to agree to settle for less now than potentially get even less or perhaps nothing at all later.
The key to effective debt negotiation is to point out why it’s a good idea for the creditor to accept less now rather than continue to push for the full balance. Creditors are no different to any of us; if we are owed a certain amount of money and we are offered less, our first question is ‘why would I accept this?’ It’s this question that needs to be answered in order to have an account balance reduced. Effective debt negotiation companies are very good at answering the ‘why’ question which is the key to a good outcome.
Debt negotiation can even help protect a credit rating as once the credit provider has been contacted on the basis
of financial hardship they are obliged to stop or not commence collection.
There are several factors that can determine how much a debt can be reduced by, however, we see many examples of
debts being reduced by 30% to 50%, sometimes more. In the end, it’s about relieving the creditor of a potential
problem, the broker being able to complete the refinance and the borrower getting what they want.
“While many people think a default and the debt related to that default are one and the same, the fact is they’re not and the process required to resolve each issue is different.”