Why Creditors Accept Less

It is pretty obvious why a debtor business would like to settle a debt for less than is actually due. What is less obvious is why a creditor business would be willing to accept less in a settlement. To more fully understand the creditor's reasoning, you need to put yourself in their position.

To begin with, past due debts represent a distraction for commercial creditors. They turn their attention away from regular business as the creditor attempts to collect. This can have an adverse impact on the revenue stream from normal operations.

Secondly, there can be real expense involved in collecting past due debts. Expenses are incurred either from hiring a collection service (who might be paid a percentage of anything collected) or from hiring an attorney (who typically gets paid by the hour regardless of any collection).

Additionally, past due debts look bad on a company's balance sheet and can cause problems when they need financing from a lender.

Given current economic conditions, most businesses understand receiving something in payment for a debt is always better than nothing. Commercial creditors know there is a very real chance a debtor business may simply close up shop and leave them high and dry on a debt.

Once you understand the psychology from the creditor's point of view, the negotiation process is much easier. Often, just making a properly worded offer is all that is needed to reach a satisfactory settlement for your client.

Scott F. Soape