Hello, I wonder if on your site you have a discussion of the ethics of debt settlement or have seen a balanced discussion somewhere else online? I know that’s incredibly vague, but surely you’ve thought about it after all this time talking with people in debt.

When is settlement a just, morally responsible response to an impossible situation versus an attempt to bolster a false sense of entitlement and abdicate responsibility? Obviously, ethics are highly personal and context sensitive, but that doesn’t make them impossible to talk about or irrelevant.

I’m really foggy in my thinking about money — which is partly how i got into debt in the first place — and I’d like help defining the questions I need to muddle through to find my own answers and figure out if debt settlement is an approach i can feel good about when it’s all said and done. Any ideas for me?

I am glad you submitted this Hilary. I have discussed this element of settling debts for less than the balance owed for a couple decades now. These conversations are usually one on one when consulting with a person struggling with debt. But the ethics of paying less than you owe is also something that has been a fundamental part of my dialogue with state and federal regulatory initiatives, and high level discussions with other debt relief industry participants.

The ethics of paying less than you owe.

For my part, settling debts for less than what is owed begins with a process of elimination. The focus is math first. Ethics are mostly only part of a consult once we determine that settlement is an option given the income and debts. But even then, ethics normally only comes up when someone has enough money to struggle through a hardship payment plan, or bill consolidation through a nonprofit credit counselor, or when I point out the chapter 7 bankruptcy is a realistic alternative to paying anything back at all (even though I explain how settling for less looks to be a workable solution for them).

By the time a person with debt troubles contacts me – by an overwhelmingly percentage – I am talking with someone who:

• Has already made bad financial decisions that cannot be overcome.
• Has already held on too long and blown through savings and other assets in order to keep the status quo.
• Has experienced a financial set back to the point they cannot afford their bills then and/or now.
• Hit the debt wall a while back and years later is in a position to resolve old bills.
• Is looking for an alternative to filing chapter 7 bankruptcy.

I rarely hear from people that can afford their debts on a forward looking basis, but who are simply interested in saving money through settlements. Consults where I wonder why they are thinking of settling at all just don’t happen.

I highly recommend anyone not yet 90 days late paying their credit card bills speak with a certified nonprofit credit counselor for a free budget and money savings call. In that call you may find you qualify to consolidate your unsecured bills, and save money each month, while paying all of your balances back over a short, predetermined time frame. You can call 800-939-8357, and choose option 1 to connect with a counselor right now.

When you’re more than 90 days late; cannot afford your minimum payments; or are trying to resolve unpaid debts in collections for some time already, than your situation is often not one of evaluating ethics, but of circumstance. In other words, the decision to not pay, or to now pay what you can afford, was made for you, and not something you had the luxury to seriously contemplate.

How we think of money and debt.

We all have opinions. How we look at repayment of debt, and gutting it out to the point of hurting ourselves and others around us, may be viewed as character building by some, and sheer folly by others. I fall into the folly camp.

I started out in the debt relief industry in the 90’s. From day one I was highly curious about all things debt and credit. I remain that way today. Early on I figured out that our entire economy is based on debt. Our government issues debt (a bit too much of it). Corporations and banks issue debt. And each of us have the ability to take on debt. We, as a society, are swimming in a sea of debt. And the unsustainable aspect of it all is baked in.

Virtually everyone in our debt and credit economy is looking out for their interests. That goes for companies, governments, co-op’s, individuals… you name it. Many of us are happy to judge others without looking deep into the system we are all participating in. If you look deep enough though, we are all on the hook for the other guys debt. That includes individuals and all the way up the food chain to banks and the government.

One aspect of the folly for those of us who gut out repayments of debts beyond our means, whether for ethical notions or something else, is that we cost society as a whole, both now and long into our later years (even after we are gone). This is not an abstract idea, but I will save further discussion for the comments if anyone wants to explore this.

Making new arrangements to repay debt.

I will hit some points home and put this page up, for what I hope will be a meaningful discussion about the ethics of settling for less, or doing anything different in an effort to repay some, all, or none of your debt.

The quickest response to whether settling debts for less is ethical is what I brought out above. If there is no money to repay, or not enough to pay in full, ethics is a distraction from reality. Getting caught up in that is a waste. But the second easy reply is two part.

1. You are at least paying what you can.
2. You are reaching an agreement to settle, not by force, but through negotiation.

Your creditors, and the debt collection industry as a whole around us, reach agreements to accept less than what is owed every day. It is part of the business model of lending. When you stop paying on time you quickly become a statistic that virtually all lenders have policies and procedures to manage.

The fact is, not everyone can repay their debt. Banks know that before they lend money.

In normal times the percentage of people who stop paying credit cards is well under 5%. We just cam through a recession that saw record high credit card defaults, and right now many banks are enjoying their lowest historical default rates, or close to it.

The point here is, as I referenced earlier, failure to repay is a known part of the system. Banks know that so many people will be unable to pay them back. Some will file chapter 7 bankruptcy where they get nothing. Some people will settle for less than what is owed, whether through negotiating a new arrangement, or being forced by the bankruptcy court to take what they get in a chapter 13. Even renegotiating the interest rates and reducing your monthly payment through a nonprofit credit counseling agency is a form of getting a different deal than originally planned.

In other words, any form of debt relief is an accepted and known eventuality by your creditors before you opened your account. You are not throwing something at them they did not already accept as business as usual. Creditors helped build the current system and are fine with it.

Beating ourselves up.

Of the many thousands of people that I have talked with over the years about problem debt, those who understand debt is just a math problem are the ones who fair the best. Those who think their debt and credit score define them as a person really struggle. These are the people that beat themselves up in order to repay their debts and keep that credit score up. Tragically, I hear from people after they have tried to solve an unmanageable problem for too long. I truly hate it when I am talking to someone who blew through exempt assets, like retirement funds, to keep up with bills that math shows they had no shot at repaying. That money is protected so that you are not, or at least less of, a future drain on society.

If the punches we throw at ourselves are powered by ethics of repaying debt, or a sense of pride, guilt, or shame, it is a damaging perspective. Believe me when I say your credit card banks and major lenders are not burdened by same.

It may surprise readers to know that, while the focus of this sites content is predominately about settling debt, most of my time consulting with people is finding out why they cannot or should not file chapter 7 bankruptcy. And that generally means unsecured creditors are paid nothing. I can argue that filing chapter 7 is more ethical than sacrificing to repay debts, even when the financial capacity exists. Of course… there are many who can argue against that, but they will mostly be arguing with themselves. We are all entitled to our opinions. Mine is developed from decades of working with people to resolve debt problems.

If you have concerns about your decision to repay/not pay back debt please post in the comments below. Drive by posters dropping one sentence turds about how everyone should just pay back what they borrow will be deleted. Add something meaningful or don’t post.

This article by Consumer Recovery Network first appeared here and was distributed by the Personal Finance Syndication Network.

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