Will Creditors Really Settle Debts For Less Than The Full Amount They Claim Is Due?

In the midst of our current economic downturn more and more Americans are finding themselves deep in debt to the point where they have creditors and collectors mailing, calling and harassing them about their past due debts. Creditors will always press you for the full amount that you owe, but is it possible to settle debts for less than the full amount they claim is due? Read on to learn if it is possible to get debt relief from creditors without paying the full amount they claim is due.

In spite of what creditors or collectors might tell you when they are trying to get you to take action today or suffer the consequences, they cannot simply take what they claim you owe them in a process that produces immediate results. Even if you owe the full amount they claim you do, the collection process can be time consuming and costly for your creditor or their collector to complete. This is equally true when the creditor's collector happens to be a debt collection law firm.

Creditors act in what they perceive to be their self-interest. So, yes, under certain circumstances they will accept as payment in full less than the entire amount they claim is due. Creditors or their collectors will settle once they conclude it is better for them to receive the lesser settlement amount now than to continue their collection efforts in the hope of possibly receiving a greater amount or perhaps even the full amount due at some uncertain point in the future.

This is particularly so if:

1. they calculate that any additional amount collected might already have been consumed by legal and collection costs along the way, or

2. they cannot see readily available assets of the consumer that could be attached to satisfy their higher claim.

Worse than that, from the perspective of the creditor, is the very real risk the consumer will declare bankruptcy. Even though the legal requirements to qualify for bankruptcy have been made more stringent in recent years, consumers with bona fide financial hardships still ordinarily qualify.

So, creditors can do the math. Getting something is better than getting nothing. In the case of a consumer filing a Chapter 7 Bankruptcy the creditor will literally get nothing. If the consumer doesn't qualify for a Chapter 7 Bankruptcy but does complete a Chapter 13 Bankruptcy, the creditor will get perhaps $0.20 on the dollar, paid out over as much as five years.

In many instances, before defaulting on payments, the consumer has been consistently making at least minimum monthly payments for years. Consequently, the creditor is likely to have received total payments equaling 1.5 or 2.0 (or more) times the amount originally charged. In such an instance the debt settlement negotiations are not about the creditor minimizing an actual loss. They are about the creditor deciding how much of their profit they will forego.

If the settlement negotiations are not being conducted by the creditor, but rather by a debt collector or a debt collection law firm, minimizing an actual loss is not a concern. However, minimizing the risk of losing potential income is a motivating factor.

Both debt collectors and debt collection law firms are generally compensated on an incentive basis depending on the amount of debt they collect. However, creditors do not give them an unlimited amount of time to effect the collection of a particular debt. They know that at some point the creditor will withdraw that account from them and send it to another organization for collection. When that happens, the original debt collector or debt collection law firm losses all of their time and effort expended to collect the debt.

So, while they will earn more if they collect more on a given account, debt collectors and debt collection law firms have strong motivations to minimize their costs of collection for each account and to accelerate the pace of collection for each account, lest they lose the account altogether. This gives them a self serving reason to accept as payment in full less than the entire amount they claim is due.

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