So Why Pay Debts Anyway...?
A recent New York Times story by journalist David Streitfeld, in which he describes how banks are allowing borrowers to settle debts for less than the balance owed, apparently struck a chord or nerve, depending on the reader's perspective.
On the one hand, those who have been paying their bills on time are incredulous that others aren't. They see these negotiated deals as unfair deals for irresponsible borrowers. Others are asking, "How do I settle?" Here's a question we received from a reader:
Reader: Quoting the article he says: "In this recession...experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts. "
So, if an agency paid $500 [or less] to purchase a $10,000 debt, why would the agency then pay legal/court fees etc [of perhaps 1 or 2 thousand] to obtain a judgment or to file suit against the debtor? [If I bought an old 1980 car for $500, I would never then pay 1 or 2 grand for Auto Insurance!]
My response: We need to look at the bigger picture here. First, many creditors first outsource their debts to collection agencies first in an attempt to collect rather than selling them outright. If a debt is sold to a collection agency for 5 cents on the dollar, that will likely occur when the debt is older and attempts to collect have failed. Generally consumers settle debts for more than 5%.
Having said that, creditors/collectors will sue if they believe they can collect on a judgment. In Mr. McClelland's case, he really didn't have any assets or even a steady paycheck. In other cases, though, creditors may be able to get a court judgment and then garnish wages or attach assets, depending on remedies available in that state.
Even if the creditor (or collector) doesn't believe it can collect right away, it may sue if the statute of limitations is going to expire. If the lawsuit doesn't result in payment (many of these cases are settled "on the courtroom steps,") the creditor may still be able to get a judgment against the consumer. Judgments fall under a different statute of limitations, and can often be renewed, which means judgment creditors can often try to collect indefinitely.
Reader: And now that debtors know this info, why will they pay the agency any more than $500? (Or anything at all?)
My response: My experience is that most people want to pay their debts. When they do default, most people are looking for a way to resolve that debt, even if it means borrowing from another source to pay the debt!
That aside, creditors and collectors have plenty of ways to encourage borrowers to make good on their debts. The threat of a lawsuit often scares people into paying, the creditor or collector may threaten to go after wages, bank accounts, assets etc. Or an unscrupulous debt collector may threaten to call the debtor's neighbor or employer, or even tell the debtor she'll wind up in a jail cell if she doesn't pay up.
Also keep in mind that settling a debt is far from a painless process. The debtor's credit rating will be shot for the time being, and there may be a taxes assessed on the settled debt. Negotiating debt is a viable option for a person who is experiencing financial hardship, and wants to resolve the debt but can't pay the full amount.
Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.





