Debt Settlements: Negotiating with Unsecured Creditors (continued)
Remembering that creditors are always looking to do what is best for them while maximizing their profits, think of what a creditor would due in the following situations:
Situation 1: Joe Smith owes $1,438.56 on his credit card. He defaults when he loses his job and is unable to continue paying on the account. Will the creditor sue? No. Litigating this matter would cost at least $2,000 because they will have to hire an attorney in Joe Smith's location to sue him. Sure, they could sue him and get a judgment for the amount due them, plus all costs of filing suit, but that doesn't mean they will ever collect. A judgment that isn't collectible is a complete waste of time and is too risky, since they have to pay the attorney's fees regardless of the outcome.
What is the option that brings this credit card company the most amount of money with the least amount of cost and risk in this situation? Write off this account as uncollectible and get a tax break and simply recover the loss by raising the interest rates and fees across the board for all customers. Would they negotiate with Joe for a settlement? Yes. If they don't, the debt collection agency certainly will. Chances are this account will eventually be turned over to a collection agency who will try to collect on it for about six months. When they're about to give up collecting the debt entirely, they will send Joe a letter offering to accept 70% of the debt as payment in full. Joe doesn't have to pay 70% because they're about to write off the debt. He can offer to pay them as little as 25% and also demand that they remove any negative information from his credit report.
Situation 2: Same facts as above except Joe Smith owes $5,000 to a credit card company. Will they sue? Probably, unless they know something about you that prevents them from suing, such as that he is absolutely broke, has no assets and is unemployed. If someone is broke and has no job he is considered to be "judgment proof". There is nothing that can be seized, garnished or levied. If Joe suspected a lawsuit was in the works, all he would have to do is start selling off his assets so that by the time the sheriff arrived at his doorstep, there would be nothing or quickly file bankruptcy. You cannot attach wages if a person doesn't have a job. A general rule of thumb is that credit card companies don't go after those they believe are broke and have no assets.
Situation 3: Joe Smith has an excellent, secure, decent-paying job. The only problem is that the IRS is after him for back taxes. They start seizing his property, including his bank accounts and began garnishing his wages. Consequently, Joe can't make the payments on his new car. The Acme Auto Finance Company repossesses his car, sells it for what they can, and plans to come after Joe to collect the deficiency in the amount of $2,500. Will they sue? No, they won't. The IRS is the most powerful debt collector in America. It can seize just about any property it wants and debt owed to it takes precedence over all other kinds of debt. All creditors know that it's a waste of time to file suit against someone who is being seriously pursued by the IRS.
Situation 4: Joe Smith had a nice-paying job for 20 years. It enabled him to buy a respectable $350,000 home, and for he and his wife to always drive late model luxury cars. In addition, he has accumulated an enormous amount of personal property and household goods over the years that he thinks has a total value of $300,000. Despite having a nice income, Joe and his wife could never live within their means. They always wanted more, and so they have 10 credit cards with credit lines of $15,000 or more per card which they used to buy luxuries: clothing, art, jewelry, vacations. They always carried too much credit card debt but somehow managed to keep it under control.
Suddenly, Joe loses his job and he and his wife begin using the cards to pay for basic items like groceries and take cash advances from one card to make the minimum payments on another. They continue to do this for 10 months while Joe looks for work. Finally, the cards are maxed out and Joe doesn't know what to do. If he contacted the credit card companies and asked for relief, would they give it to him? No! If you don't understand why, then you need to go back to the top of this page and reread it. If you still don't understand why, then pretend like you're a credit card company and Joe owes you $20,000. Would you negotiate with him for a reduced settlement? No, you would tell him to start selling off his assets so he can pay you.
If Joe does not pay this debt, his creditors will turn all accounts with significant amounts over to collection attorneys who will file suit and get a judgment so the creditor can go after his house. Suing Joe is a low risk proposition for a creditor because he has so much to take. Only a Chapter 13 would protect Joe and his wife from these creditors once they take legal action. Filing Chapter 7 bankruptcy would result in much of Joe's property being liquidated to pay off creditors.
When would Joe's unsecured creditors negotiate with him? After he and his wife have sold all of their property except for those items needed to live day-to-day (clothing, dishes, etc.), and then only if they still didn't have enough to pay all of their creditors in full. Joe and his wife might hold a massive auction and sell just about everything they own. They could take the $80,000 net profit from the sale and offer a proportional amount to the ten unsecured creditors that are owed $150,000 as an offer of settlement. They would be motivated to take it since Joe has liquidated all of his assets and there is now nothing they can recover by suing.
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