A question posted on a money message board was, is it wrong to settle with creditors? And earlier in the week, an article in the New York Times says that Credit Card companies are slashing balances. What does that mean? Basically it’s asking a creditor to accept less money than the amount owed. This typically occurs when the debt is seriously delinquent and you can afford to pay it in full. Often times people will settle with a creditor or credit card company for 50% or less of the amount owed.
The most surprising turn of events is that it’s not customers calling and asking for deals, rather it’s the credit card companies looking to settle. But why? Mostly it’s because these delinquent accounts probably wouldn’t be paying up anyway. Plus apparently banks have decided they can’t get blood out of a stone. Meaning with the recession people have a lot less assets and money in the bank to pay back these loans. Thus creditors are figuring that it’s worth getting something rather than nothing.
I guess it’s better than bankruptcy. And at least these people are paying something instead of nothing. And they do have to pay taxes on the amount forgiven as income.
Yes it’s terrible that they are getting off pretty much scot free. That they could buy and charge what they wanted without any repercussions. But maybe the banks should have been more careful with doling out credit. And maybe people would be more inclined to pay off what they owed if there were any personal responsibility left in this world. But that’s fallen by the wayside a long time ago.
So I guess it’s better than bankruptcy and walking away scott free. What do you think? Is it wrong to settle paying less than the debt? Is there a moral obligation to try and pay off what you can?
13 responses so far ↓
1 Inkstain // Jun 19, 2009 at 9:29 am
I feel a need to maintain my reputation as a member of society by not settling, but I don’t feel any moral duty to pay.
We have a system of laws designed to govern the loan and repaying of money, and those laws account for the possibility of non-payment with appropriate penalties. There is nothing wrong with acting in your own best interests within the law. The entire system is set up for people to maximize their own interests within the law, that is what a market-based economy is.
Now, if you rack up the debt with the intention of not paying it back, that’s illegal fraud. But if you bargained in good faith and now the situation has changed your assessment, it is your right to accept the consequences.
If I have a moral obligation to repay no matter what, then companies have a moral obligation not to charge me extra interest on the possibility of non-payment.
2 Inkstain // Jun 19, 2009 at 9:30 am
Actually, I take that back. I do feel a moral duty to pay. It’s part of my upbringing and I can’t change it. But intellectually, I don’t see the point of that feeling, and I don’t have a problem if others don’t feel it
3 R. May // Jun 19, 2009 at 11:51 am
I personally would feel responsible to pay the full amount, but I can’t blame someone for settling.
1. If it was really bad for the companies – they wouldn’t offer to do it.
2. A good portion of the debt is due to fees and interest charges. By the time someone is seriously in debt to that point, I’d be willing to wager what is being written off is mostly, if not all, interest and fees.
3. I do not believe that most people in that situation have purchased items with the intention of not paying for them. Which as Inkstain pointed out is fraud. If most bankruptcies in the nation are tied to medical debt – I’m willing to bet that a lot of these delinquent accounts are so because peoples circumstances changed.
4 Tara // Jun 19, 2009 at 1:09 pm
What makes this more palatable for me is the understanding that the credit card companies knowingly took on the risk that they would not be paid back – and they charged for that risk! Just like investors don’t (shouldn’t!) get a guaranteed return on investments that they *know* carry risk, and which they buy for their potential to carry a greater return, I don’t think credit card companies have a moral claim on consumers.
5 TeacHer // Jun 19, 2009 at 4:16 pm
I had a conversation with my parents about this issue about a year ago – we were talking more broadly about people who don’t pay their bills in general. With the exception of my student loans, I feel morally obligated to pay my bills in full and on time, including my credit card bills, rather than settling if I ever did become seriously delinquent. I wouldn’t feel guilty about finding a way to sneak out of student loan payments because I feel that my career (that I needed to pay to be educated for via student loans) is very important to my community and society at large, and it doesn’t pay a very high salary. I just don’t think that people in “helping” professions (doctors, nurses, teachers, etc.) who are generously accepting low salaries* for difficult and incredibly important work should have to pay for the educations that put them in those careers.
*Doctors, in my opinion, do not make nearly enough money, when the time and energy expenditure necessitated by their training programs and the crippling student loan burden most face upon entering their careers is taken into account. Especially when those same people could have spent a lot less time and money on schooling and ended up making a lot MORE money if they had become CEOs, but instead chose selflessly to serve their communities.
6 LAL // Jun 19, 2009 at 10:03 pm
I would never settle, even if was interest and fees. Why was there interest and fees to begin with? Was it my fault? Probably. Late fees? Interest? Over the credit limit? How can that be blamed on the credit card company?
Outrageous interest? Well I did sign on the dotted line.
7 Vickie // Jun 22, 2009 at 9:37 am
To settle or not to settle obviously depends on how one views obligations. But – A WORD OF CAUTION – for those who settle their debts this way, do not be surprised to receive a 1099 for the difference. That amount is now considered passive income and the IRS will be looking for you to pay the requisite taxes!
8 R. May // Jun 22, 2009 at 9:48 am
@ Teacher – Didn’t you know what teacher’s salaries were before you went to school? The fact that you don’t feel well enough paid for the work you do I don’t think is a valid argument.
@LAL – To a point – yes people did sign on the dotted line, but cc companies are sneaky and manipulative. Again – if it wasn’t good for their bottom line, then they wouldn’t offer settlement. I can’t condemn someone for taking advantage of what is being offered to them.
9 LAL // Jun 24, 2009 at 11:04 pm
Vickie, absolutely it’s considered income.
R.May, they are settling because it means they get something instead of nothing. I think that it’s very immoral to decide you’ll settle for 25% of what you bought just because you can. Why did you buy the stuff in the first place?
10 R. May // Jun 25, 2009 at 8:44 am
@LAL – I see what you are saying but I don’t think it’s immoral. I think most people in those situations are desperate. I don’t think it’s a matter of buying up lots of things then saying eh – I’m not going to pay for it all – just part of it.
It may not be what I would do for me – but I still can’t blame someone in a difficult situation for taking what is offered to them.
I find it no less immoral then negotiating on the cost of something. Businesses do it all the time – except they’re more likely just to go whole hog and declare bankruptcy.
11 LAL // Jun 25, 2009 at 9:29 am
I believe if you can’t afford to pay declare BK. If you can afford to pay off the debt but choose to settle, then it’s immoral. If you say I can afford 25% because I don’t want to use my savings i think it’s wrong.
If it’s I’m out of a job, broke, and really can’t pay. Fine. BK.
12 R. May // Jun 25, 2009 at 2:05 pm
@ Lal – I think we’ve been in the same book on different paragraph : )! I buy no means think it’s acceptable to settle if you can pay!
13 LAL // Jun 25, 2009 at 2:19 pm
Many people just want to pay less because they can. Not because it’s the right thing.
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