Settlement

A settlement resolves a debt for less than its face amount: the creditor accepts, say, 60 cents on the dollar paid now in exchange for releasing the remaining claim. Rational settlements are present-value decisions, a certain, immediate partial payment can be worth more than a larger nominal claim that is contingent on litigation outcomes, collectible assets, and the debtor staying out of bankruptcy. The realistic comparison is settlement proceeds today versus expected recovery net of legal costs, agency fees, and time, discounted for the probability of collecting nothing.

Negotiating position comes from information and alternatives. Knowing whether the debtor has assets, other pressing creditors, a lender in control, or a bankruptcy filing being prepared determines whether 40 percent is an insult or a gift. Structure protects value: settlements should be documented in a written agreement with a release conditioned on cleared funds, and installment settlements should include a default clause reviving the full original balance (less payments made) if the debtor misses, otherwise the creditor has traded its claim for an unsecured promise of a discount. Watch for checks tendered as "payment in full", since cashing one can effect an accord and satisfaction of the whole claim in many states.

Two wider considerations belong in every settlement decision. Precedent: customers and their advisors talk, and a seller known to settle at 50 percent under pressure will be offered 50 percent under pressure again; settlement authority and thresholds should be policy, not improvisation. And insolvency risk: a settlement payment received within 90 days of the debtor's bankruptcy filing may be recoverable as a preference, so settlements with visibly failing debtors are best structured with counsel, and sometimes the answer to a low offer from a debtor sliding toward Chapter 7 is speed rather than negotiation.