This paper aims to conduct a thorough comparative analysis of the debt resolution procedures for individuals in India, Canada, the United Kingdom, and Dubai. The analysis is done to highlight small differences between each process, focusing on significant differences, similarities, and resulting impacts of these processes on the financial situation of individuals. Also, it will examine the significance of advice from professionals, credit reporting processes and the effectiveness of debt settlement processes in promoting financial recovery.

What Is Debt Resolution?

Debt Resolution or loan resolution, credit resolution, or debt negotiation. In this case, the Bank/NBFC agrees to a debt reduction, accepting it as a complete and final settlement offered by the debtor. Loan resolution is a debt reduction strategy where the debtor and Bank/NBFC mutually agree on a lower sum that would be considered as full payment.

Debt resolution is a contractual arrangement between a Bank or NBFC and a debtor, wherein the debtor pays back a fraction of the outstanding loan amount, and the creditor absolves the remaining sum. It is when your debt is settled for less than what you currently owe with the promise that you will pay the amount settled for in full.

Why opt for Debt Resolution?

Debt resolution is another word for the term "debt settlement". Suppose a person is unable to fulfil the repayment obligations of a current loan due to a financial problem such as unemployment or a medical emergency, etc. Instead of allowing the loan to be classified as a non-performing asset (NPA), you have the option to negotiate with your Bank/NBFC to resolve the problem.

Debt settlement includes engaging in negotiations with the Bank/NBFC to reach an agreement on a single payment that is lower than the entire outstanding amount. The lender agrees to settle the debt for less than the owed amount because obtaining some payment is preferable to receiving nothing.

Although it may appear to be a convenient solution for resolving your obligations, it is important to bear in mind that lenders do not offer debt settlement to every borrower. The team deeply examines each case and provides the debt settlement exclusively in cases when the circumstances are genuine and the borrower is incapable of repaying the loan through any other means.

For example: an individual in India has a debt of Rs.10 lakhs, and they are looking to settle the debt through negotiations with their Bank/NBFC, the person is facing financial difficulties due to job loss but has managed to arrange Rs. 4,00,000 (4 lakhs) for debt settlement. During negotiations, the debtor proposes a lump-sum payment of Rs. 4,00,000 as a full and final settlement of the Rs. 10 Lakhs debt. After negotiations, the Bank/NBFC agrees to accept Rs. 4,00,000 as a settlement amount, considering the person's financial constraints and an amicable solution to recover bad debt.

The debtor obtains a settlement letter from the Bank/NBFC, acknowledging the settlement and stating that the debt is considered settled and credit score companies are informed after 45-90 days about this new progress about your loan to make sure that you hold no more liability towards Bank/NBFC. Later the NOC is also provided to the debtor for confirmation of the Debt resolution

As a borrower, you have the option to engage a debt settlement company which are professionals who assist you through the whole procedure of debt resolution and manage the negotiations on your behalf. These organisations establish contact with your creditors and negotiate improved payment arrangements on your behalf. They assist in resolving or diminishing your total debt liabilities. These services can be availed by the debtor to ensure that the loan settlement is legit as there are a lot of frauds that happen while you seek loan settlement.

For example: A applied to XYZ Bank for a debt settlement regarding his outstanding loan. Unfortunately, during the processing of his application, a data leak occurred, resulting in the exposure of his personal information. Shortly thereafter, A received a call from an individual claiming to be a representative of a debt settlement company, offering a seemingly attractive settlement agreement and promising a certificate of settlement upon payment.

Trusting the legitimacy of the offer and the assurance of receiving a certificate, A proceeded to make the payment as per the fraudulent offer. However, after the payment was made, the individual vanished, and it became evident that A had fallen victim to a fraudulent scheme.

What happens if you do not pay your Debt?

After defaulting for 90 days, the personal loan is categorised as a non-performing asset. Section 138 of The Negotiable Instruments Act, 1881 it states that "Dishonour of cheque for insufficiency, etc., of funds in the account.-Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to [two] years, or with fine which may extend to twice the amount of the cheque, or with both".[1] As per this Section, if the loan is not repaid after 180 days, the lender has the legal authority to initiate legal proceedings against the borrower.

Before initiating legal proceedings, the lender will use all possible means of recovering the debt, including sending two reminders and then issuing a recall letter. The recall letter will serve as the final warning, clearly stating that if the outstanding dues are not settled by the given deadline, the lender will proceed with legal proceedings.

If the borrower files an appeal with the lender and gives proper reasons for their inability to make payment, the lender can offer options such as debt modification. The modification will make it easier for the borrower to repay their loans.

Nevertheless, if the borrower misused funds and is deliberately avoiding loan repayment, or if the collateral has been sold (in the case of secured personal loans) without the lender's awareness, the borrower will face criminal charges because of failing to repay the personal loan.

• Every missed EMI will be documented in the borrower's credit history and every single EMI that will be missed will drop the borrower's credit score by 50-70 points.
• If the debt is categorised as NPA then it will be difficult for the borrower to obtain any further loans. For. e.g. Home Loans
• In case of non-payment of debt, the bank will file a case in court, resulting in court order for repayment of the full payment including penalties such as wage garnishment or asset seizure.

 

What happens if you opt for Debt Resolution?

Pros of Debt Settlement:

• Ability to pay off debts for less than the total owed balance, often leading to significant savings, thereby potentially avoiding bankruptcy.
• Potential to accelerate debt repayment compared to other methods like debt management plans or debt consolidation loans.
• Possibility of stopping collection calls by reaching a settlement or agreeing to a settlement plan.

Cons of Debt Settlement:

• Incurring various fees such as set-up fees, monthly fees, and third-party escrow fees, which could diminish the savings from the settlement.
• Uncertainty of creditors agreeing to a settlement, potential involvement with unscrupulous companies, and the risk of scams in the debt relief industry.
• Adverse impact on credit due to the requirement to cease making payments to creditors, leading to late payments, penalties, collection calls, and a lower credit score.
• Potential tax consequences as the forgiven amount may be considered taxable income, though claiming insolvency may alleviate this burden.

Cross-Country Analysis of Debt Resolution Mechanisms
India And Canada
 

India	Canada
Negotiating a new payment plan with creditors.	Negotiate a new payment plan with creditors.
Hire a debt settlement company such as Settle Loans to negotiate with creditors on your behalf.	Hire a debt settlement company to negotiate with creditors on your behalf.
Insolvency Resolution Process (IRP) allows individuals and partnership firms to initiate insolvency proceedings. The debtor proposes a repayment plan to the creditors, and if the plan is approved, it is overseen by a resolution professional.	Enrollment in a consumer proposal with the help of a Licensed Insolvency Trustee. A consumer proposal is a federal government program that can only be administered by a Licensed Insolvency Trustee. It is the safest debt settlement option in Canada and offers unique advantages that other debt relief solutions do not.
The Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings and professionals in India.	The Office of the Superintendent of Bankruptcy (OSB) is responsible for overseeing the administration of the BIA and the insolvency system in Canada.
In India, the Insolvency Resolution Process (IRP) involves formulating a repayment plan for individuals and partnership firms. This plan is presented to creditors for approval.   A resolution professional oversees the process and ensures the implementation of the approved plan.	A consumer proposal allows you to keep your assets, and it may have less impact on your credit score compared to bankruptcy.   It is a legally binding process where you propose to creditors to settle your debts, typically by paying a portion of the total amount.

Although the processes in Canada and India share similarities in terms of offering alternatives for persons or businesses experiencing financial hardships to engage in negotiations with creditors, there are variations in terms of the exact elements, legal frameworks, and procedures involved. Individuals suffering from financial difficulties should seek guidance from legal experts or financial consultants in their respective nations to gain a comprehensive understanding of the available options and the specific procedures involved.

Consumer Proposal – 'a federal govt. program carried out under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3. As an official legal procedure, it is the most secure and efficient method for resolving unsecured debts such as credit cards, payday loans, and dues of credit. Furthermore, it provides numerous additional benefits in comparison to alternative methods of resolving debt.'[2]

India And UK

India	United Kingdom
Negotiating a new payment plan with creditors.	Negotiate a new payment plan with creditors.
Hire a debt settlement company such as Settle Loans to negotiate with creditors on your behalf.	If negotiating with creditors directly proves challenging, you might consider entering a Debt Management Plan (DMP) through a debt management company. They will create a sustainable repayment plan and communicate with your creditors on your behalf.
Insolvency Resolution Process (IRP) allows individuals and partnership firms to initiate insolvency proceedings. The debtor proposes a repayment plan to the creditors, and if the plan is approved, it is overseen by a resolution professional.	In cases of significant debt, an Individual Voluntary Arrangement (IVA) might be an option. This legally binding agreement sets out new terms for repaying your debts over an extended period, usually five to six years, after which any remaining debt is typically written off. Individuals with lower levels of debt and minimal assets might qualify for a Debt Relief Order (DRO), which provides legal protection from creditors for 12 months. If their financial situation has not improved after this period, the debts included in the DRO may be written off.
The Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings and professionals in India.	The Insolvency Service is an executive agency of the Department for Business, Energy & Industrial Strategy (BEIS) in the UK. It is responsible for administering the insolvency regime, investigating misconduct

Debt Relief Order (DRO):
It is a form of insolvency for individuals in the United Kingdom with low income, minimal assets, and debts below a specified threshold. It provides legal protection from creditors for 12 months, after which the included debts are typically written off, enabling a fresh financial start for the individual.


India And Dubai

India	Dubai
Negotiating a new payment plan with creditors.	According to the 2018 Global Ranking on Debt Collection, UAE is one of the most challenging places in the world for recovering the debt.   In the UAE, debt collection starts with creditors and debtors trying to reach a mutually acceptable settlement.   If an agreement isn't reached, the creditor can pursue legal action by filing a case with the court in the UAE   If the creditor receives a favourable judgment, they can seize assets, garnishee wages, and freeze bank accounts.
Hire a debt settlement company such as Settle Loans to negotiate with creditors on your behalf.	In Dubai, debt recovery services can help lenders collect debts outside of court by gathering debtor information and professionally contacting them to communicate outstanding debts and potential legal implications if payments are not made promptly.
Insolvency Resolution Process (IRP) allows individuals and partnership firms to initiate insolvency proceedings. The debtor proposes a repayment plan to the creditors, and if the plan is approved, it is overseen by a resolution professional.	The Debt Settlement Fund was set up in 2011 to ease the burden of personal loans for low-income UAE citizens. Priority for assistance from the Debt Settlement Fund is given to: Individuals in detention due to outstanding debts. Debtors with court-issued judgments against them. Debtors under police investigation. To qualify for financial aid from the Debt Settlement Fund, applicants must be employed UAE citizens with a regular income.
The Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings and professionals in India.	In Dubai, the Financial Restructuring Committee (FRC) oversees insolvency proceedings and professionals.
In India, the Insolvency Resolution Process (IRP) involves formulating a repayment plan for individuals and partnership firms. This plan is presented to creditors for approval.   A resolution professional oversees the process and ensures the implementation of the approved plan.	The FRC in Dubai, like the IBBI in India, oversees insolvency proceedings and professionals, ensuring the regulation and facilitation of insolvency cases, including bankruptcy processes and the conduct of insolvency professionals.

Credit Report
A credit report is a concise overview of your credit history. A credit report is generated upon your initial borrowing or credit application. Creditors provide account data to the credit bureaus, which are often referred to as credit reporting organisations.

A credit score is a number representation, consisting of three digits, derived from the data contained inside your credit report. It demonstrates your credit management skills and the level of risk associated with lending you money.

The scoring models for credit assessment consider several factors:

• Payment history (~35%): It includes repayment records for various credit accounts, including how late your payments were, how much was owed, and how recently and how often you missed a payment. Also, the ratio of delinquent accounts to total accounts. For example, if you possess 8 credit accounts and have incurred late payments in 5 of them, this ratio could potentially influence your overall credit score.
   
• Used credit vs. available credit (~30%): This factor evaluates the proportion of the total available credit being utilized, including the credit limit on revolving accounts such as credit cards.
   
• Credit history (~15%): This section examines the duration for which credit accounts have been active, with a focus on establishing consistent and responsible credit handling over time.
   
• Public Records (~10%): Public records of bankruptcy, collections, or other derogatory items may significantly impact credit scores, indicating higher risk. Derogatory public records refer to negative financial events that are a matter of public record, such as bankruptcy filings, tax liens, or records of accounts that have been sent to collections agencies. These records can have a detrimental impact on an individual's credit score.
   
• Inquiries (~10%): Anytime a credit file is accessed, it is logged as an inquiry, with specific attention given to "hard pulls" or "hard hits," which may signal active credit seeking and potential financial distress. The inquiries that can affect a credit score are those associated with actively seeking credit, such as applying for a new loan or credit card. A hard inquiry serves as the primary indicator, signaling potential financial distress as the initial warning sign reflected in the credit file.

Credit Bureaus
In India, the major credit bureaus used by lenders and financial institutions for assessing individuals' creditworthiness are CIBIL (Credit Information Bureau (India) Limited), Equifax, and Experian. These bureaus collect and maintain credit information, generate credit reports, and calculate credit scores based on an individual's credit history and financial behaviour.

In Canada, the primary credit bureaus used by lenders and financial institutions to assess individuals' creditworthiness are Equifax and TransUnion.

The credit bureaus in the UK that are primarily used by lenders and financial institutions for assessing individuals' creditworthiness are Experian, Equifax, and TransUnion.

In Dubai, the primary credit bureau is Al Etihad Credit Bureau. It is the sole government-appointed credit bureau in the United Arab Emirates and is responsible for collecting and maintaining credit information, generating credit reports, and calculating credit scores for individuals and businesses in the country.

The calculation of credit scores across these countries shares similarities, as they typically consider factors such as payment history, outstanding debts, length of credit history, types of credit used, and new credit applications. However, there may be discrepancies in the specific algorithms used by credit bureaus in each country, leading to variations in how credit scores are calculated and interpreted. Individuals need to be aware of the specific criteria and scoring models utilized in the country where they are seeking credit.

Credit Score And Debt Settlement
The process of debt settlement, while reducing debt obligations, is accompanied by a detrimental effect on an individual's credit score. This is due to the fundamental design of high credit scores, which aim to reward accounts that have been consistently paid in accordance with the original credit agreement before closure.

However, a debt settlement plan, wherein a portion of the outstanding debt is agreed upon to be repaid, alters or annuls the initial credit agreement. Consequently, when the lender closes the account following the completion of the settlement, a negative impact on the credit score ensues. Furthermore, other potential lenders might exhibit reluctance to provide credit to the individual in the future.

Nonetheless, Still, the reduced debt burden may be worth a subsequent drop in your credit score. This is particularly pertinent in situations where high credit card balances and cases of late or missed payments have already contributed to a lowered credit score. Therefore, if debt settlement serves as a path for steering an individual toward a more stable financial future, it should be given serious consideration.

Conclusion
This research study provides a comprehensive comparative analysis of debt resolution methods in India, Canada, the United Kingdom, and Dubai, exploring their complexity. The paper examines debt settlement processes, regulatory frameworks, and credit reporting systems to reveal the similarities and differences in various financial landscapes.

The debt resolution methods, including discussion, bankruptcy proceedings, and settlement agreements, offer individuals means to tackle financial difficulties. Although each country may have different strategies, the underlying theme highlights the significance of seeking expert guidance, practicing careful financial management, and considering the potential repercussions on credit scores.

The analysis highlights the importance of credit reporting agencies in assessing creditworthiness, with credit scores playing a crucial part in shaping individuals' creditworthiness. The effect of debt settlement on credit scores highlights the balance between immediate debt relief and potential difficulties in getting credit in the future.

Furthermore, the study focuses on the importance of being cautious and careful while dealing with debt settlement procedures. When considering the advantages and disadvantages of debt settlement, it is crucial for individuals to make well-informed decisions and seek assistance from trustworthy experts in order to achieve effective debt resolution.

Understanding the complexity of the legal and financial systems in each country is crucial in the ever-changing field of debt resolution. This research provides individuals with the necessary knowledge to effectively manage their debts and make well-informed decisions that are specifically targeted to their personal financial situations.

End-Notes:

1. Section 138 of The Negotiable Instruments Act, 1881
2. Richard Sklar, Debt Settlement in Canada: What Need to Know, https://davidsklar.com/blog/debt-settlement-in-canada-what-you-should-know/

Written By: Rahul Gour