In this current economic crisis, there are articles floating around the internet and newspapers about how banks are settling debts for less than the actual balance owed and allowing borrowers to negotiate how much of their debt to repay. The articles seem to say that people who have stacked up large amounts of debt and have failed to make payments on that debt can now benefit from those bad decisions.  As a result of the financial crisis, debtors are now paying cents on the dollar on the balance of their debts.

Understandably, people are frustrated by this concept.  Consumers who have regularly paid their bills on time, in full find this revelation to be unfair.  On the surface, it seems like irresponsible borrowers are being rewarded, while the rest of the public are expected to continue to pay all of their bills on time.

There are many ways that credit card companies encourage borrowers to pay their debts.  First, there is the threat of a lawsuit that scares people into paying.  Creditors have legal means of collecting payment, like wage garnishments, going after bank accounts, repossessing belongings and employing debt collectors. In addition to the phone calls and legal proceedings, a debtor’s credit rating will drop significantly and will take years to repair.

After trying to collect on their own, creditors will often sell the debt to a collection agency, which may use more aggressive means in their attempts to collect.  Debt collectors, some of whom are unscrupulous, may threaten to call a debtor’s employers, neighbors, friends or relatives.  They may also use threats of jail to frighten debtors.

Creditors and/or collection agencies may sue the debtor in an attempt to collect, which could result in the debtors wages being garnished or assets being seized (judgments will depend on the state laws).  If the debtor doesn’t have the assets to settle the debt immediately, a judgment against the debtor will allow the creditor to bypass the statue of limitations on the actual debt collection and continue to collect indefinitely.

The reality of this situation is, the drastic settlement figures being written about are completely out of the ordinary.  The people paying cents on the dollar to settle their debt are often at the very end of their financial ropes.  They have no significant holdings, no steady paycheck and no assets.  They have been harassed by creditors and collection agencies and still have not paid up.  Basically, their creditors and collection agencies employed on behalf of the creditors have nearly given up hope on ever getting paid.

One should also understand that settling debt is not easy or painless.  Taxes may be assessed on the settlement, legal matters may need attending and the long-term damage to a debtor’s credit report and rating will not be easily repaired.  In the long run, negotiating debt is an option for those persons who are in serious and significant financial hardships but who still want to settle the debt.  It is not an easy, get out of jail free card for anyone in debt over their heads.

Mick Bernard is a Credit Consultant from Scottsdale, AZ. His company Credit Strategies is helping consumers clean up their credit nation wide. For more credit tips visit us at http://www.onlinecreditstrategies.com/blog/

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