I’ve continued to think about my response to David Leibowitz’s discussion of getting out of debt without bankruptcy. My first response focused on the choices inherent in paying off creditors outside of bankruptcy.
I forgot to point out the efficacy issue: if you try to pay off your debts via settlement, it takes only one or two big creditors who won’t settle on tolerable terms to undermine the entire effort to repay creditors. If you can’t get a big creditor to join the rest in compromise, you may have wasted everything you’ve paid out to compliant creditors in an effort to avoid filing bankruptcy.
My favorite story explaining why I don’t attempt debt settlements for clients involves a client who had only two creditors. Her parents were willing to fund a 50 cents on the dollar settlement if I could get both creditors to agree. It was obvious that the client could count on filing bankruptcy and discharging the debt.
Over a period of months, I was unable to get just two creditors to buy into a solution that got them half of their debt on the spot. The client ended up filing Chapter 7; the creditors got nothing.
If you want to pay creditors and be assured of a resolution, file a Chapter 13. Compel the creditor to accept partial payment.
In short, the weakness of an out of court settlement with creditors is that a real, non bankruptcy solution requires 100% participation of creditors and an absolutely assured stream of cash to pay creditors.
Too often, there are too many things that can go awry in such a scheme, and money is spent on some creditors before the approach craters.