Unemployment & Debt Settlement

Unemployment is a key contributor to excessive debt, which can lead to debt settlement. Debt settlement is endorsed by the Federal Trade Commission as an alternative to bankruptcy. Settlement allows people to resolve debts by paying less than the full balance -- sometimes as low as 20 percent of the balance according to SmartMoney, although most settlement offers are for about half the amount due.

Job Layoffs

People suffering from unemployment are often forced to reduce expenses, especially if the unemployment is long-term. Depending on the industry, a person laid off from a job during a deep recession could need a year or more to find another job with comparable pay. Some people with low debt and significant savings survive unemployment with few financial problems. Others living paycheck to paycheck with little savings and lots of credit card debt face an immediate crisis. Some are forced to stop paying credit card companies so that they can focus on food, shelter and other necessities.

Charge Offs

Ignoring credit cards leads to accounts that are eventually charged off and sent to debt collection agencies. Eventually, some credit card companies may sue, leading to possible money judgments in court and garnishment of bank accounts or wages. Some people who are unemployed resort to debt settlement to avoid lawsuits and eliminate debts they simply cannot afford. The Federal Trade Commission recommends self-directed debt settlement, although many people turn to for-profit debt settlement companies. Some debt settlement companies engage in unethical business practices, according to the FTC, leaving some people in worst financial shape than before settlement.

Challenges

Reduced income because of unemployment makes debt settlement difficult. Credit card companies and other unsecured creditors prefer lump sum payments for settlements, although installments are possible. However, the creditor may offer less of a discount if the settlement is stretched over several months. The challenge for the debtor is finding money for settlement while unemployed. Some people who have savings dip into the funds to settle, especially if they are facing a lawsuit.

Considerations

All credit card companies understand unemployment and may offer special arrangements that could lead to restoration of delinquent accounts later or settlement when the borrower can afford it. The card company may suspend payments for a while through a special "hardship" program, for example. Or for charged off accounts the card company may agree to keep the account within its internal collections department if the borrower agrees to make small monthly payments. The payments allow the bank and the borrower to stay in contact with a goal of settling the account when the borrower's unemployment ends and money is available.