Debt Settlements: Negotiating with Unsecured Creditors
Step 1. Look at the world from the creditor's point of view. Suppose your boss came to you on payday and said that he couldn't pay you the $10,000 in sales commissions you had earned because he used the money to buy himself a new yacht. He asks you to accept this fact, not complain about it, and to forgive him. Would you accept not getting paid? Of course not! You expect to get paid for your labor and you expect to get paid on payday. You made an agreement with your employer when you began working for him and you expect him to hold up to his end of the agreement.
Suppose your boss continues to refuse to pay you the $10,000 sales commission. You finally get fed up with him and decide to hire an attorney to help you get your money. The attorney tells you his fee is $2,500 and you must pay it regardless of whether or not you win the suit and are able to recover collection costs from the defendant. He also tells you that your employer will likely put up a defense and contest owing you money and that this will drag the lawsuit on for at least16 months. In any event, your attorney tells you that it will be at least two years before you see a dime, and that's only if you win.
Are you willing to go ahead with the suit? Probably so, and not just because you're angry or need the money for living expenses, but because your attorney told you that there is a very high chance that you will win. You will have to wait a bit for your money, but eventually, you will get justice. So you tell your attorney to go ahead and file the suit. Your attorney sues your former employer for the $10,000 sales commission plus all costs of collection.
When your employer receives your petition, he turns it over to the legal department. The company attorney advises your employer to settle with you because they don't have a leg to stand on. You will most certainly win the suit if it goes to trial. So the company attorney cuts you a check and pays your attorney's fees and all court costs. End of story.
But suppose something else happens when you file suit. Suppose your employer contacts your attorney and tells him that the company is insolvent and about to file bankruptcy. He offers you a settlement of $7,500. Your attorney tells you that the company is filing Chapter 13 bankruptcy and the $10,000 due you will probably never be paid if this happens. Even if you were to get lucky and get something, at most, it would be about 30% of what is due you and that doesn't include your collection costs. And if you do collect, it will be two or three years from now.
Will an unsecured creditor accept your offer of a reduced settlement if you are insolvent and on the verge of filing bankruptcy? Yes, any unsecured creditor probably will. Of course, you might counter offer with $8,000 or maybe $8,500 to try and get as much as you possibly can from your employer, but if the employer won't budge, you will eventually accept the $7,500 as payment in full and write the loss off on your income taxes. You would be a tremendous fool not to get what you can at this point in time.
Your creditors think in much the same way that you do despite the fact that they are big organizations that rake in millions every year. What is the only difference? They aren't interested in revenge or justice. You borrowed money from them and agreed to pay it back. They are willing to fight to get the money you owe them in much the same way that you would fight to get the sales commissions that your boss owes to you.
Seeing the situation from the creditor's point of view will allow you to negotiate much more effectively with them. Just as the employer for the example above did, you must present your arguments in terms of what is best FOR THEM and not you. If there is one thing you must remember when negotiating with creditors, it is the following: A creditor will always choose the option that brings in the most amount of money with the least amount of cost and risk.