 The
Process:
Creditors function under accounting principles. Whether it be
payables (money the creditor owes, for rent or inventory, for example)
or receivables (such as their customers’ debts – or
‘accounts’ – to that company) or pretty much any
other financial matter relating to the business, everything runs
on monthly accounting cycles.
When customers fall behind with payments, this is called delinquency,
and it is measured in terms of ‘aging’: 30 days delinquent,
60 days delinquent, 90 days delinquent, etc. The more delinquent
an account becomes is what determines the particular creditor’s
courses of action to collect. Generally speaking, in the first cycle
there might not be more than a reminder letter sent, by the second
cycle a letter and probably a reminder phone call. By the time the
account hits the third cycle, however, demands for payment usually
become more urgent, and if there’s still no payment received,
efforts at getting paid escalate into full-scale collection mode.
The account may be transferred to an ‘in-house’ collections
department if the creditor is a large one, such as a bank or credit
card company. The letters and calls now become more regular and
are progressively more insistent.
If there is still no payment received, at some point within this
phase the account becomes ‘charged off’ to bad debt.
This is another accounting term which basically means the account
is no longer considered an asset of the company. In effect it is
a loss to the firm and is written off. Now payment in full of the
entire debt rather than catching up on a few payments becomes the
issue: the creditor is no longer interested in retaining a customer
but in salvaging a potential financial loss. The ‘in-house’
collections department may continue to work the account for a while,
but if efforts at recovery remain unsuccessful then it will be assigned
to a third party, meaning a collection agency, with the authority
to pursue the debtor for the balance.
It’s important to understand the above, because to a large
extent it is a guideline regarding the circumstances under which
an account will qualify for a settlement. Some perfectly up to date
accounts can be settled for less than what is owed, yes, but that
is rare and the circumstances have to be extraordinary. Most settlements
are pretty much limited to accounts which have fallen delinquent
and those are the ones being discussed here. Most creditors will
not consider a settlement until the account is at least three months
past due, while for others the account may have to be six months
or more past due, charged off and in the hands of a collection agency.
There are even some creditors - fortunately a very small number
- who will refuse any and all offers of settlement other than payment
in full, no matter how old the debt may be or how impossible it
appears to collect the debt any other way. Remember, it is the creditors’
money, and their attitude to that money and their position regarding
it must be respected.
So there are various stages and degrees with creditors and their
policies regarding settlements.
As the debt ages almost all creditors will become more receptive
to offers of settlement. This is where negotiating comes into play.
There are all sorts of influences to consider at this point: the
various creditors’ policies, positions and interests; the
willingness to settle (or not); the age of the account; the collection
agency (if one is involved at this point); whether legal action
has occurred and if a lawyer is involved; the nature, experience
and character of the creditors’ negotiators; the knowledge,
skills and abilities of the arbitrator; and so forth.
For the debtor, of course, the big issue is the availability of
cash. When settlements are successfully negotiated the creditor
not unreasonably expects that money immediately in one lump sum.
The ideal situation calls for the debtor to have sufficient funds
to settle all the debts right away. But sometimes there isn’t
enough. In those instances accounts that can be settled will be,
while for the rest it’s about negotiating for more time during
which the debtor will need to raise some more money. When sufficient
money is available, the arbitrator will again approach the remaining
creditors and begin negotiating terms of settlement. It’s
a process: sometimes it’s quick, and sometimes it just takes
longer.
An account may also be in the hands of a lawyer. The creditor may
have issued instructions to sue, either directly to its own lawyer
or upon a collection agency’s recommendation. Creditors do
not always sue, and certainly do not sue simply to motivate (ie:
frighten) a debtor into paying. Legal action can be an expensive
and lengthy proposition and using it as a form of bluff or intimidation
is not an especially brilliant tactic. Collectors are known to suggest
legal action is imminent but there has to be a number of things
in play before anything like that happens.
A collection agency represents the creditor’s interests and
has to have the creditor’s authority to sue before actually
stating they will. Legal actions cost money, and the creditor will
be expected to foot the bill. So the first thing the creditor will
need to know from the collection agency is what are the chances
of recovering the debt and at least some of the legal costs if legal
action is approved. Are there assets like real estate or a vehicle
or a bank account or a job, something the creditor can attach or
seize once he’s won his lawsuit? If the collector can provide
evidence that the debtor does have assets, then the creditor needs
to make a decision whether to proceed with legal action or not.
If no assets can be found, it is highly unlikely the creditor will
pursue it. There are exceptions, of course. Debts have a statute
of limitations, usually six years. Obtaining a legal Judgment against
a debtor is sometimes used as a tactic to extend the length of that
limitation, usually for a further ten years.
Nevertheless, you need to be aware that creditors have every right
to sue and sometimes do. It certainly doesn’t mean successful
settlement negotiations can’t be done – Judgments are
perfectly negotiable. But it does demonstrate just how many different
elements (the debtor, the creditor, the collection agency, the lawyer
and the arbitrator) can become involved and how complex these negotiations
can become as a result.
Once the arbitrator has determined the balances of the various debts
and established contact with those holding them – creditor,
collection agency or lawyer – negotiations are opened. Perhaps
the arbitrator makes an initial offer, or perhaps it’s the
creditor’s side that first comes out with a figure. And so
it goes, back and forth, offer and counter-offer, until what is
felt to be a mutually agreeable final amount is arrived at and a
written offer to settle is sent to the arbitrator. That offer is
in turn presented to the debtor: the final decision is always up
to the debtor.
Successful arbitration should achieve more than just a satisfactory
settlement of the debt. There should be a final letter from each
creditor to the debtor confirming that the payment received was
in full and final settlement of the debt. And each settlement payment
is conditional on the creditor reporting the status of the debt
to the credit bureau as both settled and with a zero balance.
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