RESEARCH & LEARN

Why Creditors Prefer Debt Settlement over Bankruptcy


Mortgage Newsletter

Check Local Mortgage Rates

Today's Average 4.78%

Calculators

FEATURED CALCULATOR

Loan Program Choices

Use our calculator to find out your estimated monthly payment in advance: Enter the loan amount, interest rate, and length of mortgage.
Try our Mortgage Payment Calculator


TERMINOLOGY

If you’re trying to choose between bankruptcy and debt settlement, know that creditors would prefer to settle their debts with you than have you go the bankruptcy route. Even though settling a debt can mean receiving only 30 to 50 percent of the original balance due, creditors know that if you file for bankruptcy, that can mean they will ultimately end up with nothing.

Secured vs Unsecured Debts

There are two kinds of debts: secured and unsecured. Debt settlement is usually with unsecured debts. For unsecured debts, there is no collateral given as security in case of default. Credit cards, lines of credit and personal loans are examples of unsecured debts. Creditors usually have no recourse with unsecured debts except to settle for less than what you owe. Given that, if your circumstances have suddenly taken a wrong turn and you explain your financial struggles through a hardship letter, creditors might look to settle the monies owed rather than pushing you over the brink towards bankruptcy.

Loss Mitigation Department

Secured debts are debts with collateral given as security so that if the borrower defaults on the loan, creditors have the option of taking collateral in payment for it. Homes and auto loans are examples of secured debts. Creditors have a department of loss mitigation that especially takes care of losses in this area. They work with borrowers to ensure that creditors’ losses can be minimized in case of default.

Creditors don’t want borrowers to default on their mortgages. Before actual foreclosure, lenders will offer various methods to help owners keep their homes. These methods include loan modifications, short refinance, special forbearance and partial claim work to help owners in financial distress. Homes repossessed by lenders cost lenders a hefty sum in repairs, home maintenance and fees associated with selling. Foreclosed homes are usually in a bad physical condition because the owners did not have funds to maintain the homes properly. Before vacating the homes, some angry homeowners ransack their places and take even things that are considered fixtures. Most creditors know that helping owners keep the property is a more profitable solution than trying to repair and sell an improperly maintained house in a buyer’s market.

Negotiating with Creditors

If you’ve been unable to pay your minimum monthly payments to your creditors for several months, creditors might already have begun calling you in their attempts to collect the debts. Talk or write a letter to your creditors explaining why you have not been able to pay. Whether it’s on account of a sudden loss of income, medical injury, a tragedy in the family or an addition to the family, write to truthfully explain your circumstances. While some creditors will agree to take the settled balance in three or four smaller payments, other creditors will settle only if you are willing to pay in one lump sum. Make a savings account and begin to save a sum of money that is 40 to 50 percent of the balance in your account before contacting your creditor for negotiations. Offering one lump payment might result in a lower amount as settlement and help your creditor to readily agree to the settlement in the first place.