Is Debt Settlement Moral?


I sometimes hear from well-meaning and absolutely sincere debtors who feel that debt settlement — negotiating an agreement with a creditor to accept less than you owe as final payment on a debt — is somehow immoral. I don’t question their honor; it’s always commendable to take the moral high road, especially when there is a cost in doing so. But I do think their business and financial literacy skills have room to grow.

Let me explain why. If this is your line of thinking, I just ask that you please hear me out.

Writing off a certain amount of debt is a normal part of doing business. That’s right; companies expect to lose a certain amount of money when they lend it. There are industry standard metrics for this. As long as there is not a major default (like the housing crisis), life goes on.

Writing off debt is a tax advantage. Up to certain limits, a company can limit its tax exposure by declaring a loss on the account it writes off. So, again, corporations largely recoup their loss in normal economic times — at least indirectly. Everyone who has ever owned a business knows two things: (1) it’s always good to have a ton of things to write off and (2) corporations don’t really pay taxes; they pass those expenses on to consumers.

A delinquent account has a market value. Companies can sell their delinquent accounts to a debt buyer and recover at least a small portion of the account’s total value. How much market value? Well, that depends. The “rule of thumb” is 4–6% of the original debt amount. But, it’s not always that simple: if you’re statistically more likely to pay of your own free will — or if you have assets to go after in a lawsuit — the debt amount is more likely “recoverable.” The more quickly you are likely to pay, the more your debt is worth. This can be a “stop-loss” for the original creditor.

So, as you can see, there are several ways for a creditor to recover a portion of lost revenue when an account becomes delinquent and is passed off to a debt collector.

Are there still moral issues to consider? Sure! If you entered into a debt with the expectation that the account will eventually become delinquent and you have no intention of paying it — you’re basically stealing. So unless you’re that guy, go right ahead and negotiate with collection agencies.

Negotiating for a better deal isn’t lying. Haggling has been an essential part of doing business since at least 10,000 BCE! Times change, but even after 10,000+ years, some things stay the same. The desire to get a “good deal” on something or to limit the damage that a bad situation causes are likely to sick around forever.

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