Since the financial meltdown in September 2008, I’ve been asked on a daily basis what effect the financial crisis will have on debt settlement. Will it be easier to settle now? Will the banks get tougher and make it more difficult to settle since they’re hurting for cash? The purpose of this long overdue blog post is to provide readers with some answers on this subject.
So far, it’s still “business as usual” in the world of debt settlement. Just as the passage of the new bankruptcy law back in 2005 had a lot of people wondering if it would negatively affect debt settlement, so also the financial crisis has everyone curious about the same thing. Yet the change in the bankruptcy law had very little effect at all on the settlement strategy, and I believe the same to be generally true of the financial meltdown.
Having said this much, I should note that I have noticed some *slight* changes – a little softening by one creditor here, a little more willingness by another creditor there to discuss settlement, and so on. I’ve also noticed, however, that the banks are doing more outsourcing to collection agencies, and this outsourcing is taking place earlier in the collection process than it used to. The reason is because the banks are being hit with a bubble of delinquent credit card accounts and do not want to add staff internally to handle the collections.
Normally, the major credit card banks handle their own collection activity internally up to the point of charge-off, and only outsource after they have officially written off the debt. Since collection agencies in general are more difficult to deal with than the banks directly, this is making some creditor negotiations a little more complicated. But at the end of the day, I’m still seeing the same settlements in situations like this that I would have expected had the client been still talking directly with the bank and not an outside agency. So we call this the “rent-an-agency” effect, and where it seems to be a new tactic for a particular creditor, it’s not having any measurable effect on the outcome of the negotiations.
My prediction is that as time goes by, and the wave of charge-offs increases in 2009, it will get a little easier to settle with the major banks. But I don’t think it will make a huge difference one way or the other. Let me put it this way. There are a number of important factors that go into a successful outcome on a debt settlement program. The financial crisis will be one of those factors eventually, but not a make-or-break factor.
The news is neutral to slightly positive from my perspective, and will probably continue to become better and better for the consumer in terms of settlements. But the effect of the crisis will never be anywhere near as important as a client’s ability to raise the funds needed to settle with! That will always remain the most important single factor in achieving success with the debt settlement strategy.
So if you’re looking into debt settlement, now is as good (or better) a time as any!
Bert Kellerman says
I have been using this strategy for 2 years now, I was successfull on 1 account, Another account Sued me and I had to settle for the full amount to avoid a judgement(it was one of the smaller accounts). The largest of my accounts, I have been negotiating for a while and because of its size we have not been able to come to a conclusion. I have now been sued on this account. When talking with the Attorney/collection company they have been told to either settle or get a judgement (citibank). I believe Citibank, due to its problems, is going to this option in a way to make their unsecured debt look less damaging by hold judgements against it’s clients. When they are willing to spend money on court cost to get judgements negotiation and/or settlement leverage moves back into banks advantage. This is not good. Now my credit is ruined, the housing industry is in the toliet, I can’t get to the equity in my house (this was my final backup plan).
I know more now then I did when I first started, and I am disappointed that I did not get all the equity out of my house prior to starting the program (when my credit was still good enough to get the equity). I did not want to exchange unsecured credit for secured credit and I believed that the banks would not sue to get a judgement. Don’t believe that they will sue, and although that doesn’t change your situation, it does make it harder to clean the credit up later, if at all.
Bert Kellerman says
Typo in the last sentence, Should be “Don’t believe they will NOT sue, because they will”
It’s always been the case that some creditors sue to collect. It has
nothing to do with making their unsecured debt look “less damaging.” Rather,
it’s a simple component of the overall collection process. To those readers
considering debt settlement as an option, understand that debt settlement is
an alternative to Chapter 13 bankruptcy. Both are damaging to the credit score,
therefore credit impact is a moot point with respect to the decision as to
which option to pursue. The risk of litigation is directly related to how
long you take to settle the accounts. My current advice is that clients need
to aim for settlements within a 12-18-month window at the outside, in order
to reduce the risk of litigation to within acceptable limits, thereby making
settlement a superior option to a 5-year formal Chapter 13 plan. The bottom
line is that debt settlement only works when you have resources to settle with!