Settlements Versus Payment Plans in Debt Collection

Anybody who’s worked in debt collection has probably had a debtor request either a payment plan or a settlement in order to take care of their delinquent account. While the best-case-scenario in debt collection is to receive a full payment on the unpaid balance, this simply isn’t possible in every case. Settlements and payment plans are, in many cases, better alternatives than insisting on a full payment, but which option is preferable? In this post we will outline some of the pros and cons of each option; in the end, it will be up to the debt collector and creditor to decide for themselves which is the better option, but these tips will hopefully help make that decision easier


Pros: The biggest pro of a settlement is that the debtor agrees to take care of their entire account in one payment. Settlements are particularly useful when the customer is on the verge of bankruptcy or, in the case of commercial collections, the indebted business may go out of business. Once a debtor declares bankruptcy, it becomes far more difficult (if not impossible) to receive payments from them – even if a payment plan was created before the bankruptcy/business closure. Furthermore, if the debtor is disputing charges on the account, a settlement eliminates further arguments/compromises between the two parties.

Cons: Obviously, if a settlement is accepted the creditor is agreeing to give the debtor a discount on the amount they’re owed, and accepts less than the full amount owed to them. For this reason, we recommend pursuing other options before accepting a settlement. Furthermore, debtors may attempt to use a settlement offer to “cheat” creditors out of money they are owed, and that the debtor can afford to pay, if they offer a settlement as a way of settling disputes on the account. If the debtor’s disputes are difficult to confirm or disprove, they may make an offer hoping the creditor would prefer to save time.

Payment plans

Pros: Payment plans are a viable option if a debtor is experiencing financial difficulties. By allowing them to pay off their balance in smaller chunks over time, a creditor may receive more of the unpaid balance in the long run than by requiring a one-time payment. If a continued business relationship is desired with the indebted customer (which, in most cases, is not recommended, but each situation is different), allowing them to pay over time rather than stressing their current resources will likely preserve a better customer-creditor relationship. Another benefit of entering into a payment plan agreement with a debtor is that the plan’s terms can be adjusted over time as the debtor’s financial situation changes. If business picks up or they get a higher-paying job, you may be able to negotiate larger payments or more frequent payments to get the account taken care of sooner. A settlement, in contrast, is a binding agreement and cannot be reassessed later on.

Cons: The biggest fallback of payment plans is that a customer may make one or two payments and then stop sending money. In this case, a debt collector will have to start calling the debtor again to find out the reasons for non-payment and a new agreement may be required. Furthermore, if an indebted business is on the verge of going under or declaring bankruptcy, they may request a payment plan because they know they won’t have to continue payment after they go out of business. An indebted consumer on the verge of bankruptcy may request a payment plan for the same reason.

Of course, there are more benefits and downfalls to both options, but these basics should help debt collectors and clients make the right decision. Before entering into any payment agreement with a customer, the most important step is to find out the true reasons for nonpayment. This will give you a much better idea of what the customer can realistically afford to pay and will help you decide which of the two payment options is preferrable.


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