Payment plan
What is a payment plan?
A payment plan is an arrangement in which an outstanding debt is not paid in full immediately but instead in several partial amounts over a set period of time.
It is one of the typical tools used in pre-court debt collection and ensures that a debt can be repaid in an orderly and transparent way.
At its core, the aim is to create a solution that works for both sides. The creditor gains the assurance that the debt will gradually be settled, while the debtor has the opportunity to divide the payments and better integrate them into everyday life.
Distinction from a lump-sum payment
While a lump-sum payment clears the full outstanding amount in one go, a payment plan allows the debt to be broken down into smaller amounts. This makes it a flexible alternative when immediate full payment is not possible.
In practice, this means that instead of paying a large amount all at once, the debt is reduced step by step. This clearly sets the plan apart from direct settlement and gives it a permanent role in out-of-court receivables management.
When is a payment plan made?
A payment plan is usually concluded when the pre-court collection process is already underway but before a judicial dunning process has been initiated. It is therefore applied in the out-of-court stage.
The basic condition is that the debtor acknowledges the debt but is currently unable to pay the full amount immediately.
Often, everyday reasons make a lump-sum payment impossible, such as insufficient income or liquidity in the short term.
Here, the plan provides a solution that gives clarity to both parties: The debt remains in place but is paid off gradually.
Duration of the plan
The term of a payment plan is variable. It depends on how high the outstanding debt is and in what amounts repayment is to take place. In practice, such plans can last a few months or considerably longer.
The crucial point is that the duration is defined in advance. Only then do both parties know how long the payments are planned and when the debt will be fully settled.
How does a payment plan work in the collection process?
The basic principle of a payment plan is simple: The total debt is divided into several smaller amounts. These amounts are due on a regular basis, usually monthly. With each payment, the outstanding debt decreases until it is finally paid off in full.
Typical contents of the plan
To avoid misunderstandings, a payment plan is usually recorded in writing. Typical elements include:
The total amount of the debt
The number and size of the payments
The exact due dates
Possible additional costs or interest
The agreed payment method, e.g., bank transfer or direct debit
These details ensure that it is clearly defined when each payment is due and how it must be made.
Sequence of payments
After the plan has been agreed upon, the debtor begins making regular payments. In practice, monthly installments are the most common option, although other intervals can also be agreed. Each payment is recorded and reduces the remaining balance.
At the end of the agreed term, the debt is fully repaid. This makes the payment plan a clear and predictable way of reducing debts step by step.
Who concludes a payment plan?
Two main parties are involved: the creditor, i.e., the person or company with an outstanding claim, and the debtor, who owes the payment. Both must agree to the arrangement for it to be valid.
Role of the debt collection agency
In many cases, a debt collection agency is involved. It handles communication between creditor and debtor, prepares the plan, and ensures that everything is properly documented. It also monitors compliance with the payments and keeps track of incoming funds.
This ensures that the process runs in an orderly, transparent, and professional way. It relieves the creditor and provides the debtor with a clear framework to follow.
Where is the payment plan placed within the collection process?
The payment plan is a typical tool of pre-court debt collection. It is used before a judicial dunning process begins. The aim is to settle an outstanding debt without involving the courts. This makes it one of the most important out-of-court measures available in debt collection.
Distinction from court proceedings
The payment plan differs clearly from court proceedings. A dunning notice or a lawsuit are legally binding procedures examined and overseen by a court. A payment plan, on the other hand, remains entirely out of court.
It is arranged directly between debtor and creditor—often with the support of a debt collection agency. This makes it flexible and adaptable to the individual situation.