A Debt Settlement Example

I’m often asked how debt settlement works and whether or not it’s a good way to get out of debt. The answer to the first question is yes. Debt settlement does in fact work. The answer to the second question is that it depends on your financial circumstances. If you’re current on your debts and just want to speed up the process of paying them off, debt settlement isn’t such a good option for you. However if you’re behind, financially hanging by a thread and want to avoid bankruptcy then debt settlement is a good choice.

Here’s an example of a debt settlement along with a little background on the debtor.

The debtor is a small business owner whose business has suffered over the last few years. As a result his income declined and he had some tough choices to make such as whether to try to get his business back on track or close it and go out and get a job working for someone else, try to keep his house or move into a much cheaper apartment and so on. He was faced with the problem of too little income to cover all of his expenses and bills. He cut back expenses as much as possible but could not stay current on his unsecured debt, so he let those accounts fall behind and go to collection vowing to get them paid off as soon as his business started to turn around. To make a long story short his business has struggled for a long time. He’s barely hanging on, but his situation is slowly improving, and he’s starting to deal with his unsecured debts through debt settlement.

After he fell behind and couldn’t get caught up again, a few of his creditors sued him for the outstanding balances on his credit cards with them, among those suing were Chase and American Express. Even after these creditors were awarded judgments against him their efforts to collect were sporadic. Recently, a large collection agency acquired one of the accounts with a judgment on it and they started calling him frequently to get payment. They also employed typical collection agency tactics of using veiled and not so veiled threats to get him to pay up, “If you don’t pay we’re going to …” Right. Whatever. Then they started the kind of funny practice of offering a settlement and saying, “If you don’t take the settlement, we’re going to …” Again, whatever. The outstanding balance on the account with interest and legal fees was about $11,000 or so. About two months ago, he had about $600 put aside that could be used to settle the account so the next time the collection agency called and did their bit, he said he could offer them the $600 to settle the account in full right then and there. His offer was declined. Not exactly politely either. He wasn’t surprised.

I coached him not to even bother talking to them for at least a month. Then, even if he had more funds to work with at that point, repeat his $600 offer and negotiate up to however much he had available at that time.

About 6 weeks later a different representative from the collection agency called him and recapped the status of the account: outstanding balance with interest and legal fees a little over $11,000, principal a little over $4,600, last conversation he’d offered $600 to settle it. Then the representative told him that he still could not take just $600 to settle the account but he could waive all the interest and legal charges and settle the account for about 25% of the principal – $1155.00 as long as the transaction could be completed by the end of the month. The debtor asked for the offer in writing exactly as described and said he’d pay the settlement amount only after he received it in writing. He did a little scrambling to put the remaining funds together that he needed to settle the account. After a lot of phone calls back and forth, the account was settled for roughly 10% of the total balance and 25% of the principal balance.

He gave me permission to post a copy of the settlement letter (with all personal information masked of course) so here it is.