Pay Off or Settle Debt?

Credit card debt, medical bills and other unsecured loan obligations can quickly cripple your family’s finances if they are not addressed properly.  But what can you do about debt?  Of course, bankruptcy is one option but, in many instances, bankruptcy may not be the right option.  There are generally two ways to resolve debt outside of bankruptcy: 1) pay the debt in full or 2) settle the debt.

Paying Debt In Full:

If possible, paying off a debt in full is always your best option but may not be a realistic option.  In addition, as noted by our Under Standing Interest on Debt page, paying a debt in full over a number of years can significantly increase the amount you pay for the things you buy on credit.

Settling Your Debt:

Settling your debt occurs when the credit card company or lender agrees to accept less than you owe in satisfaction of the debt.  The process of settlement can be extremely frustrating and tricky and every bank has its own rules and parameters about settlement.

When seeking to settle a debt with a credit card company or almost any lender, the lender has no obligation to work with you or take less than what you owe.  If you want to settle your debt for less than you owe you must convenience the bank that it is in their best interest to work with you.  To do so you must typically demonstrate a hardship resulting in your inability to pay the debt, show the bank that you are insolvent and would otherwise be judgment proof or convenience the bank they will get nothing if you are forced to file bankruptcy.

In most cases, a credit card company or bank will not discuss settling your debt for less than you owe until you are at least 60 days behind on payments.  Therefore, while asking a bank to settle your debt will have no effect on your credit score, in most cases, if you do ultimately settle, the bank’s procedures will force you to miss payments and your score will be negatively affected.  In addition, it is likely that once a settlement is reached, the credit card company will report to the credit bureaus that your account has been satisfied by settlement and not paid in full.  This will also negatively affect your credit score.

When you engage in debt settlement negotiations you will likely be dealing directly with the lender or credit card company or a debt collector who has purchased the debt for pennies on the dollar from the bank.  Typically, a credit card company will keep your debt on its books and work with you as long as you are making some payments on the debt or are in their loan settlement system.  As a general rule, most credit card companies will not turn your claim over to collections until there has been no activity on the account for 90 days.  Once the claim is in collections, the collection agency is typically in no rush to settle your claim for what you deem reasonable and it can take years to negotiate a suitable agreement.

Debt settlement is a tricky and time consuming process.  If you have questions about debt collection or the debt settlement process, or if you have concerns about your mounting debt, please contact Matthew C. Bothwell, P.A.  We are here to help.