Do Credit Cards Offer Low Settlements to Avoid Bankruptcy?

If a borrower owes a large amount of money on a credit card, rather than pay the full amount, he may attempt to reach a settlement with the company to pay less than the amount he owes. While it may appear counterintuitive for a lender to agree to accept less than full payment on a debt, some credit card companies agree to settlements out of a fear that the debtor will go bankrupt.

Settlements

According to the New York Times, credit card companies typically only offer settlements to people who have already defaulted or who are at imminent risk of defaulting on their credit card accounts. A person with a healthy credit record who, from the company's perspective, will not have difficulty paying back the loan, generally will not be given the option of paying only a partial amount.

Bankruptcy

One of the main reasons credit card companies offer settlements to financially strapped clients is that the credit card debt probably would be discharged if the client declares bankruptcy. In that case, the client would no longer be obligated to pay the debt. Lowering the amount a client must pay helps prevent the client from entering bankruptcy, and receiving partial payment of the debt from the client is better than receiving no payment at all.

Collection

Another reason credit card companies agree to a settlement rather than demand payment in full is that attempting to collect the full sum can be expensive. Whether a company is using in-house resources to collect the debt or employing the services of a professional collection agency, debt collection is expensive. Often, it can make more financial sense for the company to forgo expensive collection attempts and make a deal with the client.

Effects

Although settlement may appear to be a favorable resolution for clients with steep debt, it comes with consequences. According to the New York Times, a person who settles his debt with a credit card company can expect to see his credit score drop by 70 to 130 points. As a result, clients have an incentive to pay the full amount that they owe. Therefore, by extending settlements to certain clients at risk of bankruptcy, credit card companies are not necessarily inducing other clients to try to settle.