How debt mediators distribute payments to creditors
A client on a mediation plan may make one payment each month. If the arrangement includes payment distribution, the mediator or payment service allocates that amount between the client's creditors.
One common method is a proportional split: each creditor receives a share based on the instalment agreed in its proposal. Any agreed mediation fee is dealt with according to the signed terms before the remaining amount is distributed.
Every allocation should be recorded so the client, the practice, and—where appropriate—the creditors can see where the money went.
One payment, several creditors
The point of a distributed-payment arrangement is to reduce the need for a client to manage separate payments to several creditors.
That only works if the payment is allocated accurately and sent on time. If the split is wrong, a creditor may receive less than agreed and the client's account may fall behind.
The exact payment method, fee treatment, timing, and distribution rules should be set out clearly in the agreement.
How a proportional split works
For a proportional split:
- Add up the agreed instalments for all participating creditors.
- Divide each creditor's agreed instalment by that total.
- Apply that percentage to the amount available for distribution.
A creditor with a larger agreed instalment receives a larger share. The shares should add up to the full amount available after any agreed deductions, subject to rounding.
A worked example
These figures are an illustration, not a quote.
A client pays R2,500 for the month. The agreed mediation fee is R300, leaving R2,200 for distribution.
Three creditors have agreed instalments of R1,200, R600, and R300. The total agreed instalments are R2,100.
| Creditor | Agreed instalment | Proportional share | Amount distributed |
|---|---|---|---|
| Creditor A | R1,200 | 57.14% | R1,257.14 |
| Creditor B | R600 | 28.57% | R628.57 |
| Creditor C | R300 | 14.29% | R314.29 |
| Total | R2,100 | 100% | R2,200.00 |
The amounts add up to the R2,200 available for distribution. In a live system, rounding rules should be clear so the final cents are allocated consistently.
The fee and VAT
Fee treatment depends on the agreement with the client and the practice's operating model. In the example above, the agreed fee is deducted before the balance is distributed.
If the practice is a VAT vendor and the fee is a taxable supply, VAT may apply. The client should be able to see the fee, any VAT charged, the amount distributed, and the balance remaining for each payment.
Some practices charge a fee on each payment. Others use a different fee structure. The terms should be clear before the client signs up.
Where the money is held
If a mediation practice receives the client's payment before sending money to creditors, ask:
- Which account receives the payment?
- Who controls the account?
- When are payments sent to creditors?
- How are fees and VAT treated?
- What happens if a payment is late or rejected?
- What statement or proof is provided for each payment?
The practice should keep a clear record of every payment and allocation. Depending on the practice's legal and accounting setup, that record may also support trust-account reconciliation.
The work DebtDesk automates
DebtDesk records a payment, applies the configured allocation rules, accounts for any agreed fee and VAT treatment, and produces a distribution record.
Repeating those calculations manually each month, across a book of clients, creates avoidable work and more opportunities for errors.
Common questions
How is a payment split between creditors?
One common method is a proportional split. After any agreed deductions, each creditor receives a share of the remaining amount based on the instalment agreed in its proposal.
A creditor with a larger agreed instalment receives a larger share.
Is the fee taken before or after distribution?
That depends on the signed agreement and the practice's fee structure. If the fee is taken before distribution, the remaining amount is split between creditors.
If the practice is a VAT vendor and the fee is a taxable supply, VAT may apply. The statement should show the fee, any VAT charged, and the amount distributed.
Where is the money held before it reaches creditors?
The answer depends on the practice's account structure. If the practice receives and distributes the client's money, ask how the account works, who controls it, when payments are sent, and what record you receive for each payment.
For mediation firms
Automate payment distribution with DebtDesk
Capture a payment, apply the agreed rules, and produce a clear distribution record for every client.
Book a demo