The only reason that someone (or some company) would agree to settle a debt for an amount that is less than what is owed is this... They believe, rightly or wrongly, that the debt settlement amount being offered now, is greater than what they could collect in the future.
If you yourself are struggling with a heavy debt load, you may be considering debt settlement as an option. Or perhaps you have heard about debt settlement but aren't convinced that it works. In other words, you are not convinced that you can settle a debt for less than what is owed.
Well, here's a real life example of why a company would choose to settle a debt for less than face value.
This past Saturday I was reading an article in the newspaper about famous celebrity photographer Annie Leibovitz's debt problems. She had borrowed $24 million from a finance company, Art Capital Group, in order to consolidate her debts at a lower interest rate. At the time of the article she had 4 more days (until Tuesday of that week) to come up with the $24 million to repay the loan. If she failed to do so, she faced forfeiture of the rights to her four decades worth of photographic work along with her real estate holdings.
As I write this it is now Tuesday. Out of curiosity I Googled Annie Leibovitz to see what had happened. Interestingly enough it was being reported that Ms. Leibovitz and her creditor Art Capital Group, were in negotiations to settle the debt for an amount less than the $24 million that is owed. But why would Art Capital Group do this? Why agree to settle a debt for $24 million for anything less than $24 million?
The answer is quite simple, even though the details may not be. They, (Art Capital Group) believe that they will end up with more money in the end if they can settle the debt now rather than holding out, foreclosing on the real estate and selling off the rights to Leibovitz's photography. Throw into the mix that Leibovitz may have to go bankrupt, and it complicates things even more. You know the old saying, a bird in the hand is worth two in the bush.
In the above example, Art Capital Group knows exactly what Ms. Leibovitz's financial situation is at this point in time. They know that there is a good chance that she will never pay back the full $24 million and that she may in fact file bankruptcy. And this is about the only leverage Ms. Leibovitz has right now.
If you are hoping to settle a debt with one of your creditors, you have to seek similar leverage. The main reason why credit card companies agree to settle debts with their customers for 30 to 40 cents on the dollar is because they fear that if they don't they will end up with nothing (or very little) in the future. In other words, if they feel that there is a good chance that you will claim bankruptcy, they will eventually come to the table to settle your debt.
Debt settlement is not a good option for many (if not the majority) people who are seeking debt relief. Unfortunately, many unscrupulous companies will "sell" people on debt settlement when in reality, there are better debt relief options available to them. Debt settlement is usually only appropriate for people who are truly facing a financial hardship, and for whom bankruptcy really is an option, not just a threat. Your credit card company is not going to agree to settle your $5,000 credit card debt for $2,000 simply because you ask. They have to believe that you are in extreme financial difficulty and that there is a good chance they will never get paid the $5,000 that you owe them. Otherwise they will just continue to take your monthly payment.
If you are looking to settle a debt, or are looking for advice on other debt relief options, I recommend that you seek the advice of a professional debt and credit counseling company. They will assess your situation for free, and help you set up a debt relief plan that suits your situation.