Why Would Your Creditors Agree To A Debt Settlement Reduction?

Scenario: You offer your credit card issuer a debt settlement reduction offer of 40 cents on the dollar and they take it. Your happy, of course, but wondering to yourself why they would do such a thing. Here are some reasons why debt negotiation works.

Actually, I should add "for some people" to that statement. I'm not trying to be "tricky" but the reality is that debt settlement is not right for everyone's situation. Is it right for you? Well that's not a question I can answer without knowing your financial situation, and one that is probably best left to a professional debt counselor. Or at the very least, one that you answer for yourself after a considerable amount of debt relief education, and weighing of your options. But here is a quick "rule of thumb"...

Debt settlement reduction could be right for you if you are already considering bankruptcy.

So why exactly does this form of debt relief work? And why would your creditors ever agree to taking less than they are owed? Here are the main reasons.

The main reason that a creditor would agree to take less than full value for a debt is this... They would rather get something now rather than nothing later. And that is the biggest stick that you hold when negotiating with your creditors. As I said earlier, if you are considering a debt settlement reduction plan, then a bankruptcy filing is likely also an option that you may be thinking about. And this is, of course, is something that you want your creditors to know as soon as possible. If you can convince them that their choices are either to settle the debts with you directly (or with a debt settlement company working on your behalf), or have them settled through bankruptcy, they will eventually come to the table.

Why Are Your Creditors So Afraid Of You Filing Bankruptcy?

First of all, there are two types of bankruptcy that you can potentially file.

Chapter 7 Bankruptcy - Chapter 7 bankruptcy is often called "liquidation" bankruptcy. Under this filing your debts are for the most part, wiped clean. Since the new bankruptcy laws came into effect, it is much more difficult to qualify for this type of bankruptcy.

Chapter 13 Bankruptcy - Chapter 13 bankruptcy is often called "reorganization" bankruptcy or "wage-earners" bankruptcy. Under this filing you would be expected to pay back a percentage of your debts over the course of a 3-5 year period.

Your creditors, of course, will not know which "Chapter" of bankruptcy you would qualify for and you should use this to your advantage. For your unsecured creditors, the prospect of you filing Chapter 7 bankruptcy is their worst nightmare. In this circumstance they would get nothing. But what about Chapter 13 bankruptcy? Would your creditors fair any better? Well, yes. But they would still likely end up with 25 to 50 cents on the dollar, and it would take up to 5 years for them to collect that money.

Let's work the logic on this from your creditor's point of view.

Let's say you are the credit card company and one of your customers owes you $20,000. At this point in time you are pretty sure that the customer is in a dire financial situation. But after 6 months of non-payment on the account, you start to worry that you will never be repaid the money you are owed. (Alright, credit card companies don't "worry" about one individual account but they will take notice from a pure business perspective.) Right around this time (and timing, as they say, is everything) the debtor calls you and offers to pay you $8000 within 30 days in the form of a debt settlement reduction.

You weigh your options.

If you don't take the cash, they may file Chapter 7 bankruptcy, leaving you with nothing. Or, they may file Chapter 13 bankruptcy, leaving you with 50% of the debt (if you are lucky) paid out over the next 5 years (if the debtor keeps up with the payments).

$8000 now, or "maybe" $10,000 over the next 5 years?

I don't know about you but the $8,000 now seems pretty tempting. Too tempting in fact. And the reality is that credit card issuers accept debt settlement reduction offers like this every day of the week. Assuming, of course, that you negotiate properly.

Who Negotiates The Debt Settlement Reduction?

Good question. First, you have every right to negotiate your own debt settlements. And some people do choose this option. But there are a couple of other options.

One other option (and this is the most popular) is to hire a professional debt settlement company, or an attorney to settle your debts for you. If you decide to use a debt settlement company, I also strongly urge you to at least speak to an attorney as well and get their take on whether you qualify for bankruptcy and whether bankruptcy might be a better choice.

Your final option when it comes to debt settlement reduction is to negotiate the settlements yourself, but with the ongoing guidance of a professional debt settlement "coach".

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