In order to settle debt for less than the principal amount owed, a lump sum of money is mandatory. In most instances, this is not practical, but on occasion funds are realizable. The debtor may have resources available for procuring funds, and these options should be explored by the consultant.

Any settlement reached on behalf of a debtor during negotiations should be fully documented. The debtor will be given a release by the creditor, pending final payment. It is useful to obtain the creditor’s consent to update the local credit bureau that the claim has been resolved. This often facilitates the debtor obtaining credit in the future.

As a general statement, with 50% of claims, the creditor will settle for 50% of the claim. Most creditors will settle for less than the claim, given creditors have often “written down” an amount that has gone to a formal collection process or litigation, and face the following:

  • Charges of perhaps 30% (including taxes and disbursements) for collection and execution;
  • A substantial delay before the matter is resolved;
  • A further outlay of funds before any benefit is realized;
  • The real possibility of a dry judgment or payments being ordered in small amounts over long periods of time;
  • Provisions in the Bankruptcy and Insolvency Act that help debtors to seek protection; and
  • Interruption of the creditor’s business when dealing with counsel, answering interrogatories, attending examination for discovery, searching for documents; and otherwise dealing with the claim.