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Debt Settlements And Why Creditors Agree To Them

For most people, the chance to lift the weight of debt from their shoulders is extremely attractive – and the sooner it can be done the better. But managing multiple debts and covering the cost of living at the same time is a tricky undertaking. Little wonder debt settlement, as a way to clear debts, is an option that is growing in popularity.

What might seem strange, however, is that creditors are willing to agree to these programs. After all, they want to receive as close to 100% of the debt due to them, but in some cases concede to receiving just 30%. For debtors, clearing debts quickly through these settlements is ideal; but the creditors face making losses.

So why do they agree to them? What benefit is there for them? Understanding how creditors view debt settlement agreements will answer these questions, and help debtors understand what they can hope for when beginning negotiations.

What Creditors Want And Settle For

There is no denying that creditors want their money, and they are willing to hire collection companies to pursue their debtors vigorously. But it is important to understand that it is nothing personal. Their willingness to accept debt settlements shows they are willing to compromise.

The fact is that lending institutions are used to dealing with borrowers (even honest ones) who fall on hard times and are no longer able to meet repayment obligations easily. They know that blood cannot be drawn from a stone, and so clearing debts quickly can sometimes mean cutting their losses – getting something instead of getting nothing.

This is the mentality that creditors have, but while debtors may hope to secure a debt settlement agreement for something like 30% of the actually debt sum, creditors want to secure a much higher percentage. So, negotiations can be tough.

Looking At The Bigger Picture

But this does not explain why creditors are willing to accept any reduction in the sum owed to them. Debt settlement means that an agreement is made to wipe out the total debt in return for receiving a percentage of that debt figure. So there must be losses.

This is true, but lending institutions have more than single loan losses to consider. The bigger picture involves acknowledgement of the hundreds of thousands of loan agreements made every year. Receiving a percentage of money owed can translate to hundreds of millions of dollars. This is better to have than not have.

What losses are made by clearing debts quickly are covered by the loans that are honored by good credit borrowers, and this means that profits can be made anyway. And their shareholders need this to be confident in their investment, otherwise share prices fall. So, debt settlement agreements do benefit the creditor too.

Avoiding The Alternative

Finally, creditors will do whatever they can to ensure their debtors avoid the bankruptcy courts. The reason for this is that the terms of a bankruptcy are out of their hands. It is the court that decides how much (if any) of the debt is paid. Debt settlements leave them in at least some control of that factor.

It depends on the bankruptcy chapter that the debtor files their case under, but the creditor could be left with nothing. Chapter 7, for example, would leave them with none of the balance repaid. Credit card companies in particular fear this.

Everyone sees the benefit of clearing debts quickly, but it is just a matter of how the final repayment is. For creditors, there are as many positives to gain from a debt settlement agreement as there are for debtors, so negotiations are nothing to fear.

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