So Why Pay Debts Anyway...?

It seems that 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, 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 solutions 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): "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 one or two 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 one or two 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 five cents on the dollar, that will likely occur when the debt is older and collection attempts have failed. Generally consumers settle debts for more than 5 percent.

Having said that, creditors/collectors will sue if they believe they can collect on a judgment. In this man's case above, 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 upon applicable the state laws.

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 jail cell if she doesn't pay up.

Also keep in mind that settling debt is far from a painless process. The debtor's credit rating will be shot for the time being, and there may be 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.

Comments

[L.B.]

What kills me is that the people that are looking for the easy out and trying to settle on credit cards (which they clearly owe and clearly had no problem spending the money) are the same people that gripe and complain about their credit rating and the use of credit scores to determine their credibility or credit worthiness. I've made my own mistakes and have been in a situation where I could have filed bankruptcy or settled on my debts. Would it have been easy? Would it have saved me money? Absolutely. But I didnt. Why? Because I spent the money and I owed the debt. "I" was to blame for my situation - not the banks, not the credit crisis, not the subprime mortgage meltdown, not the credit card companies, not the pre-approval marketing ads - it was all me. I made poor decisions and got myself into debt. I lived beyond my means. But instead of placing the blame on everyone else's doorstep and trying cheat the system, I sucked it up and paid back every dime I owed. It was a hard lesson but I learned from it. I learned to live within my means and that sometimes - 'thing's aren't nearly as important as 'self'.

The fact is that when you try to cheat the system and settle to save a buck, you end up paying for it in the long run. You'll kill your credit scores, other lenders are going to see that you don't live up to your obligations and you're going to pay higher interest rates in the future "IF" a lender decides to take a risk on you because of it. It's just too bad that those of us who actually have ethics also suffer by paying higher interest and penalties because of the losers that are looking for a cheap, easy way out. In order to compensate for losses, that's exactly what credit card companies are doing. I wonder why?

To be fair, I am NOT talking about those that have legitimate reasons for settling - those that have had unfortunate life circumstances like medical issues or job loss - I'm talking about those that are clearly capable of paying their debts as they agreed to when the lender extended them a loan or credit limit. People slam the credit card companies - yes, they take advantage of consumers, but we don't HAVE to do business with them - and if we were to look in the mirror, it's obvious that many of those complaining about the credit card issuers would be the first to stand in line and screw the company out of money by taking advantage of the crisis and settling.

The whole thing disgusts me. One day Americans will wake up and go back to the way their parents and grandparents were raised. You do what's right - not what's easy. You stand by your obligations instead of trying to cheat the system. Suck it up, people.

[David Leibowitz]

Bankruptcy is hardly the easy way out. People who I represent in bankruptcy cases have suffered illnesses, job losses, calamities of nature and other economic catastrophes far beyond their ability to deal with. No doubt we all have to start living in a society where we defer our gratification. You can't "have it all right now" just because you have a credit card. And we all now know that our houses are not our piggy banks. However, for more than a million families a year, bankruptcy is the right choice. So if you can't handle your debts in a reasonable debt repayment plan, if your creditors won't reduce interest rates to give you a fighting chance, if you are facing universal default, lawsuits, wage garnishments and harassing telephoning calls, do consider bankruptcy. Find a good bankruptcy lawyer at www.abcworld.org or www.nacba.org. Or in Illinois or Wisconsin, find us at www.lakelaw.com. You'll get a fresh start and be glad you did.

[Elva Ya]

Keep away from credit cards debt and variety types of other debts is the best way to keep your life health, i think.
Pay on time, pay the ammount which you can afford to repay and keep away from debt.

Elva