At first blush, a debt settlement plan or agreement seems like a bad deal for the creditor. The creditor has (in most every case) a signed agreement with the debtor that the debtor would pay the lender in full for any debts and interest accrued by the debtor under the terms of the agreement. In a debt settlement agreement, the creditor appears to forego his or her legal rights to collect on the outstanding debt and instead agrees to accept an amount that is far less than what is actually owed.
Understanding why a creditor would agree to such a plan can help you determine whether a proposed debt settlement plan would be accepted by your own creditors. Some of the factors a creditor will examine when considering a debt settlement plan include:
- The statute of limitations: Under the law creditors only have a limited amount of time within which to bring a lawsuit to collect on an outstanding debt. This time limit is referred to as the statute of limitations. If your debt is approaching the statute of limitations, it may influence the creditor to accept your debt settlement plan.
- The likelihood of bankruptcy: In a bankruptcy, the debt you have with your creditor may be able to be discharged with the creditor receiving nothing at all (if the debt, for instance, is a credit card or medical debt). If your creditor believes there is a reasonable likelihood that you will file for bankruptcy if your debt settlement plan is not accepted, your creditor may opt to accept the plan and be paid something rather than risk being paid nothing at all.
- The costs of litigation: It is expensive and time-consuming to file a lawsuit and obtain a judgment in court (not to mention that there are limited defenses the debtor can raise that would result in the dismissal of a lawsuit filed by the creditor). If a creditor determines that the amount it is likely to receive from a successful lawsuit is less than the amount of time and resources it would take to file the lawsuit, it may be more inclined to accept your debt settlement plan.
- Your resources: If your creditor believes you have or will have sufficient resources to pay the debt back in full, it is not likely to accept a debt settlement plan for less than the total amount. However, if you are of limited means and demonstrate that your financial situation is not likely to change in the foreseeable future, the creditor may be more willing to consider a debt settlement plan.
- The generosity of the creditor: Sometimes a creditor simply believes that a debt settlement agreement is the appropriate way to resolve your outstanding obligation. If there were special circumstances that caused you to fall behind in paying your debt (serious illness, loss of job, etc.) the creditor may be persuaded to help you by agreeing to your debt settlement plan. Similarly, if you have a number of accounts with the creditor, if you will be doing other business with the creditor (such as where the creditor is a local bank where you have both credit cards and deposit accounts), the creditor may be willing to accept your debt settlement plan in an effort to maintain a good customer relationship and keep you from taking your other business elsewhere.
The worst that can happen when proposing a debt settlement plan to a creditor is that the creditor would say “no,” so it rarely (if ever) hurts to propose a debt settlement plan. An attorney can help you draft a proposed plan that includes information about your situation that can help persuade a creditor to accept your plan.
Find out what makes a creditor more likely to accept a debt settlement plan by contacting the experienced attorneys at Ariano & Associates, PLLC.