Debt Settlements - What You Need to Know
Positively, every debt problem has a potential solution. Whether negotiating with your original bank or with a new fund that has purchased your loan, the process of securing a debt settlement agreement (“DSA”) is seldom straightforward. It can be made more achievable by engaging with a trusted and experienced adviser early on to work with you alongside your accountant, solicitor and new lender.
Instinctively people see a sale of their loan to a new fund as negative. It doesn’t have to be. For many, this represents a great opportunity for a fresh start. While your previous bank may not have wanted to or were prevented from agreeing a DSA, the fund which may have acquired your loan will likely have a very different mandate.
Through constructive, early and proactive engagement with your new loan owners or their appointed agents, your advisers may reach a compromise much quicker. Negotiations can be tough but they tend to conclude quicker than with a traditional lender.
At Onate, we regularly finance these transactions. This involves us lending to the borrower to help fund their debt settlement and regain control of their assets. For precisely this reason, we have teamed up with CKS Finance to write this piece on debt settlements.
Have realistic expectations and expect to be asked questions
You wouldn’t sell an asset for less than it is worth so don’t expect your new loan owner to accept less. A credible debt settlement offer, coordinated by your adviser in conjunction with your solicitor and accountant and signed off by you, will be required. If new funding is needed, early engagement by your adviser with a potential funding partner will also be necessary.
A good adviser will ask you the hard questions before they go to bat for you with your new loan owner. They will ensure they fully understand your personal and/or company finances and will seek a huge level of detail to do so. While this can seem excessive, it is a critical part of very necessary due diligence in order to maximise the chances of reaching a DSA on your behalf.
Your adviser will go through a full financial assessment process with you covering all options for dealing with your debt. This may include completing a Statement of Affairs (“SOA”) or a Standard Financial Statement (“SFS”), before submitting an agreed proposal. Your adviser will then consider and discuss the debt management options available to you.
A DSA may require you to sell properties, or you might need to refinance the properties with a new lender. It might also involve some combination of interim and bullet repayments or it may simply be a single lump sum to settle the debt.
As an independent adviser regulated by the Central Bank of Ireland, CKS Finance works with many different funders, both traditional and alternative, to secure the most suitable and competitive package for their clients. Here are some of the most common pitfalls and misconceptions they regularly see:
1. Focusing on what a fund may have paid for your loan will not help
What a fund paid for your loan is the legal right to recover the full balance plus the interest outstanding and in the absence of clear and concise financial evidence to the contrary, this may be the starting position.
2. No two deals are the same
Forget about what you heard down in your local (beer garden) about John getting an 80% write off or Mary securing a “soft deal” from one of the funds. Every debt case is different as are the individual circumstances and family position of the people behind each loan.
3. Avoid surprises and be transparent with your trusted adviser
By not disclosing key information to your trusted adviser, you can undermine their ability to negotiate on your behalf so give them a full suite of information - warts and all! If your adviser finds out from the bank or fund information that you didn’t disclose to them, then this can have a very adverse impact on debt negotiations.
4. Be prepared to go the distance
Debt resolution can be a long, protracted and difficult process so you need an adviser who has the patience, stamina and necessary expertise to drive the process forward.
A so-called “vulture fund” may be in the market to try to make a quick profit or they may be happy to wait, collect the rent or income and allow the property market to appreciate before they push for a sale or exit with the borrower to maximise their return.
Completing the deal
It is important to remember that negotiating a DSA is only one part of the process. Unless you are simply selling assets, your adviser will likely also need to raise finance to complete the DSA and they may need to do so within a tight timeframe, if you are to avoid penalties or a breach of agreement. A good adviser will have kicked off the funding process in parallel with the settlement discussions.
Funding for a DSA is often required quickly and bridging finance like that provided by Onate can serve a valuable purpose, especially where residential property is concerned.
Working with your trusted adviser, Onate can engage early to help clients finance settlements on residential investment properties. We can also look at funding settlements that contain a minority of commercial property within them. Being in a position to make a fully funded DSA proposal is a major benefit and likely to assist a swift conclusion at a more attractive price. It also provides time to build a more sustainable, longer-term debt solution.
This article has been written in collaboration with CKS Finance Ltd.
This article does not constitute formal advice but is intended to provide some helpful guidance and information on the area of debt settlement agreements.
If you have any further queries or to see how our lending process works, visit www.onate.com.
