Why Creditors Prefer Debt Settlement vs. Bankruptcy

Deciding on debt settlement vs. bankruptcy will not only affect your financial history, but will also affect the amount your creditors receive from you as well. Debt settlement is the process of negotiating the remaining sum of debt down to a lower amount in exchange for a fast, lump-sum payment. Bankruptcy, however, is a legal process where a court liquidates your assets and determines how to distribute the remaining funds to your creditors. Creditors tend to prefer settlement. This means you have a good chance of negotiating settlement terms with a creditor or collection agency by reminding them how they will benefit.

Settlement does not Prioritize

When you settle debts, you arrange an agreement with each lender independently. If one lender is a bank, another an investor and a third a private individual, they will all have a chance to work out the details of the exchange with you without factoring in the decisions of the other.

If the debt enters bankruptcy, the court will prioritize your obligations to the lenders. There will be a primary debt, usually any bank debt or mortgage, and then subordinate debts, arranged by the court in order. Lenders at the bottom of the list may not receive any money if the assets run out before reaching them. Lenders would prefer to work with you in order to prioritize their debt than let a court determine this for you and for them.

Settlement does not Involve the Courts

Lenders do not want the decision for payment to be decided by the court system. They would prefer to maintain complete control over the terms of the agreement, between your party and theirs. Once the courts get involved, the lenders must stop contacting you completely and follow legal system requirements.

Furthermore, all contracts will be reviewed and verified in court. If there is any flaw in the debt contract entered into the court, it will be removed as a valid debt. Information agreements, like a Memorandum of Understanding, will not be enforceable in a court of law. Documents signed without a witness or notary may also be compromised. If records of your payments have not been accurately kept, a judge may further determine the lender was not meeting its end of the obligation.

Settlement is Faster

With all of the administration and legal proceedings required in court, the process ends up taking much longer than an average debt settlement negotiation. A bankruptcy can take up to five years before it is totally resolved. During that period of time, a lender cannot retrieve any money and can not contact you. Collections agencies must stop contact immediately. By the end of the bankruptcy proceedings, the amount owed will be of significantly lower value due to inflation and other financial circumstances. It is in the best interest of the lender to settle the issue immediately through discussions with you or your debt settlement agency.

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