Debt Settlement… Simplified

We’re breaking down the in’s and out’s of debt settlement so you can made an informed and educated decision.

Why do Creditors Settle?

It seems really odd that a creditor would actually let you pay less than you owe on an account. While it would be nice to think that they want to help a distressed customer out, that just doesn’t seem to be in the nature of a Big Bank. The truth is, it is a business decision that creditors will make for a variety of reasons.

Cut Their Losses

The biggest reason that creditors will accept a settlement is because the account is past due. Once an account has been past due for some time, the creditor wants to cut their losses and will offer a settlement on the account. They would rather receive a portion of what is owed rather than have it completely disregarded.

In addition to cutting their losses on their initial loan, they also want to minimize the cost of collecting on the account. Each time a bill collector unsuccessfully picks up the phone to call and settle a debt, it is costing the company money. Each letter sent, each manual review of the account, these all cost money to the company. This is just one of several reasons that they will accept a settlement of less than the full amount that is owed.

Tax Benefits

Before a creditor will settle an account, they will almost always go through the internal process of charging off the account. This is their writing the loan off as a loss, in turn reducing their taxable income. A charge off does get reported to the credit bureaus and is a negative remark, so that should be noted.

Clear Their Books

Banks are regularly reviewed by regulators and investors, and they have to make public their delinquency rates which are a negative reflection of the bank. If one bank shows 10% of their loans going delinquent, and the next bank only has a 3% default rate, the other bank may be viewed more favorably. For this reason, a creditor will settle debts for less than what is owed in order to clear their books to improve some of these factors.

Want to learn more of the in’s and out’s of debt settlement?

Here are two other articles you might like:

Do All Creditors Accept Settlements?
What Is Debt Settlement?