Do debt collectors prefer lump sums or payment installments?
How age factors into the creditor's decision to go to trial
Last week, I wrote about the frustration of trying to negotiate settlements with companies who care only about money without actually needing money. These mega-companies are not under the constraints of a normal creditor, which needs money to pay its bills. So how do these companies decide the amount for which they will settle the case?
I don’t profess to have the inside knowledge about what these companies are “thinking.” But after negotiating hundreds of these cases, one thing has become apparent. At some point, a mega-creditor is asked to decide which is more valuable: the less-than-full-amount settlement offer on the table or a judgment for the entire amount claimed in the lawsuit.
Let’s say the amount claimed in the lawsuit is $15,000. And my client (the debtor) says one of the following:
Answer 1: “I could pay $7,500 now in a lump sum to settle the case”
Answer 2: “I could pay $12,000 total at $300 a month.”
This puts an original creditor into the position of calculating whether the prospect of $7,500 now or payments over a period of 40 months for a total of $12,000 is worth more or less than a money judgment that is soon to be entered against the defendant/debtor.
(Note: This calculation is going to be different for a debt-buyer as opposed to an original creditor because original creditors are much more likely to end up with the judgment after trial than debt-buyers.)
Judgments in Illinois are good for up to 27 years. They become a lien on any property the debtor owns. Judgments allow wages over a certain amount to be garnished and money to be taken from bank accounts. Judgments also bear interest at 5% per annum. The judgment creditor has to figure out whether it is more likely to come out ahead by turning down a settlement offer to get a judgment instead, which it can try to enforce 10, 15 or 20 years from now.
So mega-creditors try to predict collectability. Do public records show that the debtor owns any real estate? If so, the judgment will be a lien on the property. They can then collect on the property sold. Or, the debtor dies and leaves it to his or her heirs. Maybe the debtor is younger, which could potentially mean there is a longer period of time for a creditor to try and collect. But if the debtor is a senior citizen, there may not be as much time to collect.
(Note: Of course, there is always the chance that an 80-year-old can outlive a 30-year-old for any number of health or tragic reasons. The example above is based solely on the average age of longevity.)
Although I can’t say for sure how a creditor evaluates a settlement offer, it’s safe to say at some point it’s got to weigh the above factors before deciding whether to go to trial.
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