Debt Settlement & Negotiation - Why Would A Creditor Reduce The Debt Owed?

One common question asked by consumers who are considering debt settlement is, “Why would the creditor agree to reduce the debt that I owe?” This is a valid question, and truth be told, creditors prefer not to accept a settlement when full payment is an option. However, when full payment is not an option, a settlement is an attractive option for creditors. This being the case, in order for a creditor to even consider a settlement, the debtor must be behind on their payments because once a consumer has defaulted, then the likelihood the full payment is realized decreases dramatically.

For one, many overextended consumers file bankruptcy, oftentimes leaving the creditor with nothing. By not accepting a lump sum of guaranteed money on a delinquent debt, creditors are defying financial lessons that are backed by years of statistical data on past due or charged off debts.

Secondly, the collection costs of pursuing a past due debt can be expensive. Many collection agencies charge a 30% contingency fee for any consumer account and up to 40% if the accounts are forwarded to an attorney for litigation. In other words, in a best case scenario the creditor only gets back 65% of what was owed, and in most cases, since the probability of collecting the full amount on a delinquent account is so low, they receive less than 65% of what is owed because they allow the collection agencies to accept settlements anyway.

In other situations the creditor may sell your delinquent account to a debt buyer, typically for 10-12% of the balance. Compared to the other options on the table, there is little reason for a creditor not to accept a settlement offer of 40 to 60 percent of the balance owed.