Receivable/Accounts - Information for Credit and Collection Issues

Thursday, May 31, 2012

Debt Settlement

There is a lot of buzz in the news lately for debt settlement companies, or debt settlement strategies laid out in books such as Mark Silverthorn’s “The Wolf at the Door”.  While there is a lot of press (good and bad) about settlement, there is very little being said about the mechanics and consideration surrounding a settlement of debt, for both the consumer and creditor.

The simple truth is that anyone can make a settlement offer at any point. The consumer doesn't need a trustee, consumer proposal, or debt settlement company in order to achieve a settlement. The creditor can make a settlement offer without waiving their rights to balance in full.  However, there are certain things you should do to protect yourself and convince both sides to accept a (reasonable) offer.

What Is a Settlement?

A settlement, simply put, is a sum less than payment in full offered that will satisfy the creditor and resolve an outstanding debt. In order to have payment on account be considered settlement, both the debtor and the creditor need to take certain steps to protect themselves.

On the Consumer Side of a Settlement

Whether you are offering a settlement to a creditor, a collection agency, or a lawyer, your offer should be one that is reasonable – the philosophy behind a settlement is a quick and painless method of resolution on an account, to save unnecessary grief and aggravation on a debt.

The best offer you can make is a single, lump sum payment in a timely fashion, that is a percentage of the debt owed.

There is little harm in making a settlement offer – the worst that can happen is the creditor will say no. It displays your intent to work with the creditor, and is a far better alternative to burying your head in the sand and hoping the debt will go away, or worse yet, inflate with interest or affect you through the credit bureau or pending legal action.

When you make your offer, ensure it is going to someone with the authority to give it meaningful consideration – this can be the collection agent assigned to the file, the credit manager of the company, or perhaps even the principal of the company owed funds. Understand when dealing with a collection agency or lawyer, they may not have the unilateral authority to accept a settlement – they may need to seek permission from the client. When you make an offer, ensure it is legitimate, and you have the funds available to meet this offer if it is accepted. If you have settlement accepted, and you fail to follow through with payment, your offer will expire and the client will understandably demand payment in full, and consider further settlement offers as disingenuous.

If your settlement is accepted, ensure that you receive a letter stating that upon payment of the settlement amount by the indicated date, the debt will be settled, and the creditor releases the consumer from any obligation or demand in relation to this account.

After you have paid the settlement, keep proof of payment or a receipt, along with the offer of settlement in your financial records for at least seven years! Sometimes, mistakes can happen and the creditor may reassign the file to a second collection agency, or the settlement will not be reflected correctly on the credit bureau – these records showing the settlement offer and payment are essential to protecting yourself as the consumer.

There is nothing stopping you from making a settlement offer without representation – some creditors will respond favorably, others will not accept your offer unless it comes from a credit counseling company, power of attorney, debt settlement company, or from a trustee’s consumer proposal. Some of these options have no cost attached, while others will charge a fee or percentage in order to broker your settlement offer – tread carefully, and understand what cost you are incurring, and what service or guarantee you are receiving from these third parties.

On the Creditor Side of a Settlement

Obviously, when a consumer makes a settlement offer, there should be incentive for the creditor to accept it.

If you have initiated a settlement offer, ensure you do so in such a way that does not harm your company's position to expect payment in full -- if a consumer is offered a settlement, or your company has a reputation for accepting settlements on a regular basis, many consumers may expect further offers down the road.
Please consider on a settlement:
 • Is it a lump sum? A settlement broken down into payments is no better than a payment schedule on a balance in full. If it is a lump sum, is the offer timely? The whole point of an offer is quick and painless resolution – a settlement six months from now defeats that purpose.

• Is the original amount owed significant? No one wants to bother with a settlement on a token balance of $65.38. However, an offer on a balance of thousands of dollars may bear consideration.

• Is there a reasonable margin for settlement? If there is interest accrued, it may be waived, or if the debt is under dispute, can it be dollarized to an agreed amount? Are their court fees, collection costs, or legal costs that can be avoided if settlement is accepted? These factors should all be considered when receiving an offer.

• Has the debt aged? Generally speaking, the older the debt is, the less likely it will be remitted voluntarily. Is the settlement offer relative to the age of the account?

• Have you taken into consideration the consumer’s means? If the consumer is seeking a consolidation loan or refinancing on mortgage equity, and they can establish to you the available funds are limited, a settlement is reasonable – on the other hand, if the consumer is driving this year’s Mercedes-Benz, and their credit rating is impeccable, perhaps a settlement should be rejected in favour of payment in full or the enforceable consequences of non-payment.

• Will accepting this settlement create consumer goodwill, retaining them for further business, or create a positive impact on your company’s reputation?

Certainly, any settlement offer on a significant balance should be given consideration, and a professional response should be offered to the consumer, whether the settlement is accepted or not.


Settlement can be a useful negotiation tool for both parties involved in a debt – however, both parties should deal with each other honestly and fairly.

If you are interested in further information, the Receivables Management Association of Canada is hosting a webinar on June 7th with speakers on both the consumer and creditor side of issues debt remediation.  The panel includes Doug Hoyes of Hoyes & Michalos, Richard Cooper, the CEO of Total Debt Freedom, Jeffrey Schwartz of Consolidated Credit Counselling Services, and Jim Novosad, the President of ARO Inc.

The details event can be found here: always, if you have any questions regarding settlements on accounts, and information on how to protect yourself when offering or receiving a settlement, you are certainly welcome to contact myself.

Blair Wettlaufer
Kingston Data and Credit
Cambridge, Ontario

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