Debt Arrangements & Creditor Settlements

Not every debt situation requires opening insolvency proceedings. Where it is possible to raise a one-time sum, to create a realistic payment flow, or to present creditors with a preferable economic alternative, a debt arrangement may allow the crisis to be ended more quickly and with greater flexibility. A creditor settlement is therefore a targeted solution for debts – sometimes without the need for a full insolvency proceeding.

A proper arrangement is not merely a request for a discount. It requires precise mapping of the debts, examination of security interests and guarantors, an understanding of each side's bargaining power, building a source of funding, and legal planning that will ensure that once payment is made the debt is indeed closed, the proceedings are cancelled, and the client is not exposed to further demands.

The Or Rovner Law Office represents debtors in negotiations with banks, credit companies, institutional bodies, suppliers, authorities, private creditors and their counsel, and also in arrangement proceedings under the Insolvency and Economic Rehabilitation Law where judicial approval of a comprehensive arrangement is required.

Before Taking Another Loan to Close the Debts

A new loan is not necessarily a debt arrangement. If it merely replaces one creditor with another, increases the monthly repayment, or is spread over years at a high interest rate, it may postpone the crisis and even make it worse.

A loan taken for the purpose of an arrangement may be an effective tool when it enables a genuine reduction of the debts, closes all the relevant obligations, creates a monthly repayment that can be met, and leaves the ongoing budget balanced. Before signing, one should compare the total amount to be repaid, the interest, the security interests, the effect on guarantors, and the alternative if the loan is not taken.

What Types of Arrangements Can Be Formulated?

An Individual Arrangement with a Single Creditor

Where there is a debt to one creditor or to a small number of creditors, it is possible to negotiate directly over a reduction of interest and expenses, a fresh spreading of payments, a one-time payment to settle the debt, or a combination of an advance payment and instalments.

A Comprehensive Arrangement with Several Creditors

Where debts are dispersed, central planning is required: setting an overall budget, a fair division among the creditors, obtaining undertakings to close files, and coordinating payment dates. There is no point in concluding one debt if the other creditors continue collection proceedings that frustrate the arrangement as a whole.

A Debt Arrangement Within Legal Proceedings

Where individual consent cannot be obtained from all creditors, it is possible in suitable cases to proceed by way of a proposed arrangement under the Insolvency and Economic Rehabilitation Law. The proceeding may include filing an application with the court, setting out the economic situation, proposing consideration to the creditors, convening creditors' meetings, a vote, and approval of the arrangement in accordance with the majority and the conditions prescribed by law.

An Arrangement After Enforcement Files Have Been Opened

Even where files, attachments and restrictions already exist, negotiations can be conducted. In such a case the agreement must expressly regulate a stay of proceedings, cancellation of attachments, closing of the file, updating of the balance, the fate of guarantors and security interests, and the consequences of a breach of the arrangement.

An Arrangement with a Secured Creditor

A debt secured by a mortgage, a pledge or another security interest requires separate treatment. One must examine the value of the security, the outstanding balance, the priority of the claim, realisation options, and whether it is possible to refinance, to sell independently, or to reach a spreading of payments that will prevent forced realisation.

How Is a Proper Debt Arrangement Built?

Stage One: Mapping and Verifying the Debts

Agreements, account statements, demand letters, warnings and enforcement printouts are collected. The principal balance, the interest, the expenses, possible prescription, defence arguments, payments that were not credited, and guarantees are examined. Sometimes the amount demanded is not the amount that should be taken as the starting point.

Stage Two: Examining Capacity and the Source of Payment

A proposal that cannot be performed may make the situation worse. Accordingly, disposable income, family assistance, a loan, the sale of an asset, the realisation of a right, or staged payment are examined. The purpose of the arrangement is to end the debt – not to postpone the crisis by a few months.

Stage Three: Creating a Negotiation Strategy

Every creditor has different interests. Some creditors will prefer an immediate sum, others will ask for spread payments and security, and a secured creditor may hold significant bargaining power. The proposal is built on the basis of the alternative available to the creditor if the arrangement is not approved, including the time to collection, the costs of the proceeding, and the expected rate of repayment in the insolvency track.

Stage Four: Full Legal Anchoring

An arrangement must set out the final amount, the payment dates, the manner in which funds are credited, cancellation of proceedings, closing of files, deletion of the remaining debt, release of guarantors and security interests as agreed, delivery of documents, and confirmation of the absence of debt. Care must be taken with clauses that allow the creditor to reinstate the full debt without taking payments into account, or to continue collection proceedings in parallel.

Stage Five: Performance, Monitoring and Tying Up Loose Ends

After the agreement is signed, the payments and the creditor's undertakings must be monitored, and it must be verified that attachments have been cancelled, that the enforcement files have been closed, and that settlement confirmations have been received. Where the arrangement involves several creditors, it is important to manage performance in a coordinated manner.

Possible Advantages of a Debt Arrangement

• Flexibility in structuring the amount and the payment dates
• The possibility of avoiding the restrictions and consequences of a full insolvency proceeding
• Shortening the time needed to deal with the debts
• Better preservation of privacy and of control over assets, depending on the circumstances
• Reduction of interest, expenses and sometimes part of the principal
• Creating legal certainty and a concentrated conclusion of collection proceedings

Alongside these advantages, an arrangement generally requires a genuine source of funds and cooperation on the part of the creditors. Where it is not possible to offer reasonable consideration, or where key creditors refuse any framework, other alternatives must be examined.

What Must Appear in the Final Agreement?

A telephone promise of a "discount" is not enough. Before transferring money, it is important to verify that the agreement regulates at least the following matters:

• The final settlement amount and the precise dates
• Whether the amount includes principal, interest, expenses and legal fees
• What will happen to attachments and restrictions, and when an application for their cancellation will be filed
• The date for closing the enforcement file and updating the debt balance
• Deletion of the balance once the arrangement has been fully performed
• The status of guarantors, additional debtors, pledges and security interests
• A grace period or a cure mechanism in the event of an isolated delay
• What remedies will be available to the creditor if the arrangement is breached, and how payments already made will be credited

A Practical Example: Why a Comprehensive Arrangement Is Needed

Suppose a debtor holds a limited sum that is sufficient to settle one debt, but four files are being conducted against him. Paying the full amount to the first creditor may close one file, while the other three creditors continue to attach the bank account and the salary. Sometimes it is preferable to present all the creditors with a coordinated framework, conditional on the consent of a sufficient proportion of them and on the parallel closing of the proceedings. The example illustrates why the overall picture must be examined before the first money is transferred.

When Is a Debt Arrangement Less Suitable?

An arrangement may be less effective where there is no realistic source of funding, where there is a substantive dispute over the very existence of the debt, where a secured creditor is already at an advanced stage of realisation, or where even after the reduction the debtor will not be able to meet the payments. In such situations, one should first examine an objection, a defence argument, a payment order, a planned sale of an asset, or insolvency proceedings.

Good Negotiation Begins with the Full Picture

Before approaching a creditor with a proposal, it is important to know what the correct debt balance is, what can be offered, and what will happen if the proposal is rejected. Advance planning makes it possible to negotiate from a considered position and to avoid committing to an arrangement that cannot be performed.

Frequently Asked Questions