Why does debt settlement work? Banks in the process of lending, know that a percentage of accounts will not perform, meaning some accounts will default and go unpaid.
There is a multi-billion dollar industry built around the known fact that not everyone will be able to repay their debt.
This collection process is centered on a lenders effort to "lose the least".
The tools and mechanisms in place for this "lose the least" effort are by and large, predictable.
Once an account becomes seriously delinquent, the odds of ever being paid another penny on it decrease dramatically.
Creditors have the option of accepting less than the balance in satisfaction of the entire debt, or drop the account into the collection pipeline and see what they get on the other end.
This pipeline consists of 3 options, assign, sue or sell, or what I jokingly refer to as A-S-S.
I could write several chapters on each of these collection pipelines, but the purpose of this post is to focus on the math your creditor has to work with when you are unable to pay them.
Assigning your debt: Assignment collectors are companies who, on behalf of the creditor, are attempting to collect on unpaid balances.
Generally, whatever they collect, they are paid a percentage.
Credit card issuers will grade the performance of those they assign debt to and will continually award collection files to the best performers, the companies who get them the most money.
Assignment of debt also has different tiers.
You may be contacted by one collection company for a few months, then a different one after 90 days, and even another one 90 days after that.
The collector's job is to get as much as they can for their client, the bank, and to secure the best return for themselves on their performance based fee.
Assuming the collector is able to collect 50%, the creditor may see a return of as much as 35% of the assigned balance.
This number is a moving target, per account, per portfolio, per tier, per creditor.
  Being sued to collect your debt: Creditors select accounts for immediate referral to law firms in order to collect.
Some law firm's collection attempts will be very similar to an assignment collector and the firm is paid a performance fee just like assignment collectors.
Others may start off with that appearance, but will then begin legal process in order to collect.
Attorneys who sue in order to collect will generally add legal fees to the final judgment amount.
Most law suits for unpaid credit card debt go uncontested and default judgment is entered against the debtor.
The judgment itself is piece of paper, but with legal enforcement implications that allow for collection of the debt via lien, levy and garnishment.
Being sued in order to collect has its own costs that will vary, with no guarantee the judgment can be collected on.
For your creditor, this means higher cost's with an unknown return (rest assured the return as an aggregate justifies the expense enough to keep this part of the pipeline in tact-otherwise it would no longer be supported).
Selling your debt: There are different tiers of debt sales.
Your account can be sold several times and will have a different value at each sale.
I want to focus on the sale done by the original creditor, who you opened your account with.
Five or so years ago, while attending a collection industry seminar, I sat down briefly with a VP of risk management for the now defunct WAMU, who told me at that time, WAMU was catching bids of 15 cents on the dollar for freshly charged off debt (that number was consistent with the daily updates I was seeing from industry newsletters I receive).
Charge off generally means the creditor is no longer expecting to be paid and is recording the debt amount as a loss.
That was then and this is now.
In the current economy, portfolios of charge off debt are being bid at 8-9 cents.
When your debt is purchased, the buyer will then subject the accounts it purchased to the A-S-S principle described above.
The buyer has risked their capital with an expectation that they will be profitable by making an ASS of themselves.
Sorry, couldn't help myself.
Historically, the percentage of nonperforming credit card assets has been low, less than 5%.
In today's economy, that number has skyrocketed to all time highs.
Default on mortgage debt, commercial debt, revolving unsecured consumer debt (credit cards) are all approaching, or have surpassed any prior precedent.
Focusing on unsecured credit card debt; how has all this affected settlement? Well, look at the math.
Your creditor will often "lose the least" be reaching agreements with those in serious delinquency before they drop it into the collection pipeline.
This is why settlement works, whether 10 years ago or today.
  With these increased portfolio losses at all time highs, banks would prefer to work with the consumer in order to lose the least.
Consumers, whose financial situation suggests settlement is a good option to pursue, will find by working directly with their creditors they will often be in the position to save the most.
There are a few of the larger card issuers with whom the best savings will not be achieved until the account is placed with outside collection, but for the most part, reaching an agreement with the original creditor is in the best interest of the bank and the consumer.
It is why our focus at CRN is to strategize with each individual consumer, where ever possible, and design a plan that will get them out of debt in the quickest way possible.
Yes, our approach is one of the most aggressive in our industry.
We are the crash diet of debt reduction.
  To learn more about how you can drastically reduce your debt weight, visit Consumer Recovery Network.
By: Michael Bovee CRN President