Being in the real estate Short Sale niche over the past 3 years has given me insight to how banks view their customers. It’s also given me insight to the process involved in settling a debt for less than you owe.
I won’t go into detail about the different types of debts that you can have as most of them fall under the category of consumer debt. I’ll focus primarily on these debts as they are the ones that are most often settled for less than is owed. Consumer debt is basically anything that is not a mortgage. There. That makes it simple. So how do we settle for less?
Let’s break it down to a rudimentary example. You loan me $100.00 and I pledge to pay it back $10.00 at a time for 10 months. For the first 3 months I pay on time, and you’re happy about that. In the fourth month, I pay you late, and you extend some grace to me, but that doesn’t last long. In the fifth month, I simply don’t pay you at all.
Quick recap. You’ve loaned me $100.00. I’ve paid you back $40.00. I still owe you $60.00, but for some reason (and this is where the moral argument can be born), I am not paying you any more. That reason may be legitimate, or not, but either way, the bottom line is, I owe you $60.00 and I am no longer paying.
It’s at this point that the relationship between the lender and the borrower becomes strained. Whether you’re a bank, or just a friend lending money, you don’t want to have relationships in your life that become tainted by unfulfilled commitments. They’re no fun. Until the original agreement is either fulfilled, or renegotiated and ultimately settled, you’ll have tension.
(On a side note, the difference between a personal loan to a friend and a loan from a bank is that your friend probably cares about you and the value of the friendship isn’t worth the tension that a loan brings to it. The bank, on the other hand, doesn’t give a crap about you. They just want their money, and they’ll use every psychological tactic to instill fear in you to get what’s owed them.)
Both have one thing in common, however. Both will always take less than you owe, if and only if they have come to believe they won’t get anything from you. That’s the “hands in the air” feeling.
So in this example, I owe you $60.00 and I haven’t paid you in a long while, and it’s starting to affect my life in ways I don’t want. So, to get the problem solved, I manage to strike a secondary deal with you (second to the original loan) and I offer you $20.00 to call it even. You may want to know why, but ultimately, it’s been long enough that you no longer care about my hardship, nor do you want any excuses. You just want some of your investment returned to you so you can go about your life and find better places to put your money. So, you take it, and you settle the debt forever.
This simple exercise works whether you owe your friend $100, or you owe the bank $200,000. Lawsuits are expensive, and nobody wants to go through them, so 99 times out of 100, he to whom you owe will take less than you owe when it comes down to it.
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