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In this article, my aim is to explain to consumers the *why* of credit card debt settlement, meaning *why* a bank would be willing to negotiate with its customers and accept a payoff amount less than the full balance owed.

In my view, once you've understood this background information, it becomes very easy to understand why consumers can negotiate *more effectively* with their creditors than so-called professional negotiators.

I'm assuming that you're already familiar with the basic concept of debt settlement, but if you're looking for a primer that compares credit card debt settlement to other approaches like bankruptcy or credit counseling, please download my free 32-page report, How to Eliminate Your Debts Quickly and Safely Without Filing Bankruptcy.

Why Do the Banks Settle?

Debt settlement gets discussed endlessly online, but too often the basic mechanics of the process are ignored. What is it that prompts a bank to accept a settlement for, say, $3,000 on a $10,000 balance? If you listen to the sales pitch, you'll be told that the company has "special relationships" with the banks so they can get better deals for you.

This is totally false. Credit card debt settlement simply does not work that way. It is the BANKS that are doing the settling. They could all decide in unison tomorrow that they aren't going to settle credit card accounts anymore, and poof – the industry would disappear overnight!

That won't happen, of course, simply because the banks settle for reasons that are based on sound financial principles. Most emphatically, the banks do NOT make settlement decisions based on the skill level of the "professional negotiators" who call in on behalf of their customers.

So why *do* the banks settle? Simple. FINANCIAL MATH. They look at consumer behavior over a large pool of delinquent accounts, meaning *millions* of accounts marching toward charge-off. They have historical data indicating what they are likely to collect on a large block of accounts beyond charge-off, and have calculated that they will recover more money by settling with their customers than they will by pursuing aggressive collection tactics.

Remember, we are talking here about a large-scale general collection policy that includes settlement for less than full balance as a strategy. There can certainly be exceptions to this on an individual account level. For example, a creditor might decide to pursue legal action on an account where the consumer had taken large cash advances or made major purchases followed by immediate default.

To put figures to this, let's say a $10,000 balance is reaching charge-off soon. One approach is to insist that the customer agree to a payment plan or the file gets forwarded to a law firm for legal action. While that might work in many cases, it might prompt a bankruptcy filing in many more, so a balance has to be struck.

When the bank looks at a huge population of such cases, they may conclude that *in aggregate* they will only recover 15 cents on the dollar through standard collection methods. Yet their customer will happily agree to settle for 30 cents on the dollar, with the funds coming immediately from a cashed-out Roth IRA (or family loan, insurance policy, savings, etc.).

This is an effective doubling of the expected recovery rate, and therefore actually represents a far better outcome for the bank. The fact that it's also a better outcome for the customer really doesn't enter into the equation!

The banks are not accepting credit card settlements because it benefits the consumer. They do it in order to reduce their losses on accounts that will become less recoverable over time.

Now, once you understand that virtually every bank sets a range for settlement agreements, then you have a mechanical system a program can be built around. That's what we've done here at ZipDebt. We've cracked the code on what the major banks will agree to for settlements, and we provide our clients with that information. A program that includes training, coaching, and creditor-specific settlement targets takes all the guesswork out of the process for clients handling their own negotiations.

Further, it's very important to understand that the average consumer has a *huge* advantage over third-party debt negotiators. The reason is because the bank will always be willing to speak directly with its customer, so he or she can talk to the creditor BEFORE charge-off.

The banks won't even return phone calls from debt settlement companies, so all the accounts have to go past charge-off first before the negotiations can even start – this introduces a very dangerous 6-month delay when you hire a professional negotiator.

If you're thinking about taking the DIY approach to credit card debt settlement, you can relax and stop worrying about not being a professional negotiator. You already have a big edge in being able to talk directly with your creditors before charge-off, and thereby take advantage of various settlement opportunities that will take place automatically. All you need to know is how to ask for a settlement, and that can be easily taught. Negotiation skill should be the LEAST of your concerns!

Let me put it this way. If a creditor usually agrees to settlements in the range of 30-35% paid over 90 days, and they rarely (if ever) sue customers before charge-off, then negotiation skill comes down to whether you get the deal at 30% or 35%. If you're a good negotiator, you can get that extra 5% savings. But most people would be thrilled at the prospect of saving 65% off their debt balance, so the negotiation factor is by no means the most important factor in achieving successful settlement results. It's more about understanding the mechanical process that individual creditors utilize when they make settlement decisions.

Charles J. Phelan has been helping people become debt-free without bankruptcy since 1997. A former executive in the debt settlement industry, he teaches the do-it-yourself method of debt negotiation. Audio-CD material plus expert personal coaching helps consumers achieve professional results at a fraction of the cost. More information ...

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