Why Debt Settlement Works
Many might ask themselves why creditors would take a settlement on a debt when owed less than the full amount. Here I will list some of the reasons.
1) Legal action is costly and may be unsuccessful. Creditors don’t like to hire lawyers and go to court anymore than people do due to costs of lawyer, court costs, etc. Then, even if a judgement is secured it may not result in income for the creditor. For example the client may already be garnished as the maximum allowed by their state. Or the person may be self employed, unemployed, or retired. Also the people might not have assets to go after. Overall the harder it is to get money out of someone the better option debt settlement is.
2) Collection action is costly and may not be successful. Some creditors hire collectors to collect on delinquent debts. This costs money. Other creditors sell their debts to collection companies. They sell the debts for pennies on the dollar and so have already lost by taking this option. Moreover, since collection agencies bought the debt cheap they can settle the debt and still make a good profit. This is why it is often best to settle with collectors rather than creditors directly.
3) Cash is king. Just as we believe $1 now is way better than potentially nothing later, creditors need to keep up their cash flow. This is a main reason why debt settlement is most effective when the pay term is short. Some creditors settle very low if money is available to do so early on (first 90 days).
All in all debt settlement works in most cases. But the very best situations are when the person’s assets are low, incomes are hard to get at, and when some money is available to settle with in the short term.
Jason Belmont is a credit and debt counselor with Crusader Consumer Services ( http://www.crusaderservices.com )
Add comment July 6th, 2008
