Banks Have Incentives To Settle With Judgment Debtors Quickly For Low Amounts of Cash
Everyone knows that it is very hard to negotiate with a bank to modify a bank loan. Banks are difficult creditors to deal with. Yet, after a bank which has already sued and has a judgment against you is a relatively easy creditor. Banks tend to accept very low settlements of judgment debts whether the debt is related to a mortgage, a credit card, or a commercial loan. I never understood why banks tend to settle for "pennies on the dollar", although I assumed they had good reasons to resolve their claims quickly and cheaply. This past week I discussed bank settlement policies with a new client from Chicago who had worked there for the FDIC for many years. He was quite familiar with the internal workings and thinking of commercial banks.
The client explained why banks are anxious to settle judgment debts. I'll try to paraphrase his explanation in layman's language. If a bank has a personal judgment against you the bank reports the judgment as an asset. Accounting rules require that the bank mark down the judgment to its present value. Given the difficulty in collecting judgments in Florida against people with financial problems the bank will discount the judgment to a low percentage of face value. Next, the bank has to evaluate both the cost of pursuing collection, including attorneys fees, and also the administrative costs of carrying the judgment. I was not aware that bank's incur significant administrative expenses of carrying bad debts such as accounting, auditing, and valuation of the debts. Typically, banks find that given the uncertainty of collection, the time and expense of collection, and administrative carrying costs, it is better for them to accept almost any amount of cash offer to settle the judgment debt. Additionally, bank regulations require banks to have capital reserves to offset "bad debts" so that uncollected judgments requiring setting aside capital which otherwise could be used to make new loans.
My retelling of my client's explanation may not be totally accurate, but I think I understood the general point. Bank accounting and financial regulations render uncollected debts low value assets which are expensive to maintain on bank accounting books. If a bank has a judgment against you start your negotiations with a very low cash offer.
That was very helpful information for my practice. Thank you.