Given the state of the economy over the past few years, many, many people have debts they can no longer pay. One of the ways those debts are settled is through negotiations that end with the debtor satisfying the debt by paying less than the full amount owed. Though this has become a fairly common practice, it can be gut-wrenching for a Christian. We are required by our faith to pay our obligations, and settling a debt for less than the amount owed can seem un-Christ-like.
Bankruptcy and foreclosure may not elicit the same level of concern. Though they too can be seen as unholy based on biblical interpretation, they at least have the blessing of the civil authorities and are legally binding on all parties.
Settling a debt for less than the amount owed, however, is an informal arrangement between you and one or more creditors. Perhaps since it isn’t ruled on by a judge, it’s viewed as a greater sin. But is it?
What does the Bible say about repaying debt?
The Bible is quite clear when it comes to paying our debts; consider the following verses:
Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law. — Romans 13:8 NIV
It is better not to make a vow than to make one and not fulfill it. — Ecclesiastes 5:5 NIV
The wicked borrow and do not repay, but the righteous give generously; — Psalm 37:21 NIV
There doesn’t seem to be any wiggle room here, does there? In addition to paying our debts in full being “the right thing to do,” it’s also a very good Christian opportunity to witness. It says we honor our obligations and work to live in peace with the world around us.
If you’re in a situation right now of needing to settle one or more debts for less than the full amount owed, let this experience be a reminder that we should never take borrowing lightly. The better course is to avoid it as much as you can so that you aren’t put in positions such as this where you have to make tough choices.
If the choice is between survival and paying a debt . . .
Sometimes you’re between the preverbal “rock and a hard place” — debt has a way of making that happen (which is why it’s to be avoided). You may be forced to choose between honoring a debt and supporting your family, but if that’s the case, the Bible also tells us this:
”Anyone who does not provide for their relatives, and especially for their own household, he has denied the faith and is worse than an unbeliever” – 1 Timothy 5:8 NIV
That verse isn’t specifically about obligation hierarchies, but it does gives us unmistakable direction as to where our priorities should be. And this is especially true if you have responsibility for dependent children or elderly or disabled adults; they cannot take care of themselves and it falls on you to do it for them. Debt settlement becomes a consideration when your obligation to the people in your care is at stake.
Before you attempt a debt settlement, first consider the alternatives.
Keeping the above in mind, what should you do if you are in a situation where debt settlement needs to be considered?
Pray for guidance.
You’ve incurred a debt that Scripture requires you to repay, but you also have family survival issues and the Bible is clear on that as well. Is there a “biblical” way out? Pray about it; pray long and hard. Consult with other believers. You never know what God will open your eyes to or make available to you. You’re in a difficult situation—trust Him for direction.
Retirement accounts or other investments.
Do you have retirement accounts or some stock that you could liquidate, or partially liquidate, in order to pay your debt? Most people will advise against doing either because of potential tax consequences, but in order to honor paying a debt you may have to consider ALL assets. Of course you only want to take this route if the tax consequences don’t put you in a deeper hole than you are already in with your debt.
Get an additional income.
The inability to satisfy a debt is often due to short term financial difficulties, like a rash of unexpected expenses. Consider getting a part-time job to get over the rough spot. You can even consider starting a side business cutting lawns, shoveling snow, doing home repairs, typing or tutoring.
Though it’s usually one of the first options people consider when they need money, you’d probably be better off avoiding borrowing money from family or friends to pay your debt. You may not be able to repay your family member or friend for all the same reasons you can’t pay your creditor, and that could add relationship conflict to a debt problem.
Note from Bob: If you find yourself in this position, we have partnered with a Christian Debt Management company that works with you to help you better manage your debt rather than settling it. Find out more here.
Debt settlement should never be used to engage in strategic default.
Debt settlement should never be used as a backdoor path into strategic default or anything that looks remotely like it. You engage in strategic default when you walk away from an obligation when it no longer benefits you to honor it. However, failing to pay a debt that you could in fact pay is really another form of theft.
Debt settlement should only be undertaken when it’s a matter of personal financial survival. You’re working out some sort of debt reduction as a means to provide life’s necessities for yourself and your loved ones. Any other purpose for debt settlement can be a form of strategic default. And as Christians, that’s not a route we should ever take.
If after considering all of the potential options, you do enter a debt settlement with a creditor, be sure that all terms are agreed to in writing before sending the creditor any money. Verbal agreements are not enforceable in court.
This is a tough issue! What are your thoughts on Christians settling their debts for less than what they owe? Leave a comment below!
{ 30 comments… read them below or add one }
While I agree completely that we should pay all the debts that we incur I believe there is also a business side to this equation. When taking out a loan via a financial institution (bank, credit union, etc…) the initial few years of payments are mostly interest. So many individuals that the banks are allowing to short sell or get out of their debt obligation in some similar manner have actually paid a good majority, if not all of what the difference in obligation is. For example if someone held a 30 year, $200,000 loan at 6% interest for 5 years they probably paid the bank roughly 50,000-60,000 in interest(assuming payments of $1900/month). If the bank then lets the customer short sell for $40,000 less is there still an issue with not paying your debts as the bank is actually making a $10,000-$20,000 profit as oppose to losing any money?
Hi Aaron–Your analysis highlights one of the complications of a strict biblical interpretation of debt repayment. In biblical times, lenders were not allowed to even charge interest, so in a real way we’re talking about two very distinct transations. The question of settling is a really complicated one and that’s why it needs to be approached with prayer and deep consideration (influenced by prayer!)
Don’t forget about the 1099 that the homeowner of the short sale gets at the end of the year. They get to claim the bank’s write off as income.
Hi Marsha–Yes, and that has implications as well that most people don’t consider. Fortunately the tax on the defaulted debt is a good deal lower than the debt itself. Also, there was a temporary exclusion on the tax for primary homeowners, don’t remember if it’s been continued.
Hi Kent–There usually are alternatives when you owe more than you can pay, and that’s especially true with medical bills. Sometimes it’s just a matter of summoning up the courage to ask.
Creditors and vendors are dealing with a lot of delinquent or dormant debts right now and they’re often willing to work something out as a way of getting at least some money on the accounts and so that they can close them out.
I agree, they will often work out payment plans, or settle for reduced amount- something I tell folks about. However if someone can pay the entire sum, probably best practices to try to do that even though the collector bought the debt for a fraction of the dollar.
This IS a tough issue. It’s always best to pay off in full, whether that means taking on a new job, spending less, dipping into retirement, etc. But sometimes we find ourselves in situations where none of that is possible…then what? And actually, I feel this conundrum goes beyond Christians and to the population in general. If you borrow a certain amount of money, you are obligated to pay that back. If you don’t, won’t that just increase the costs for other people with loans and other consumers in general? I know some companies will extend out the amount of time you have to pay, so that you can make smaller payments…. that could help sometimes. But in the end, I have to agree with the post that careful thought, prayer and consultation should be had.
Hi TB–You’re shedding light on the big picture, which we need to do. Any time someone doesn’t pay a debt, it has a negative affect on the whole lending process and that affects everyone. We should always be mindful of this, in addition to personal needs and faith considerations.
You are forgetting the parable where the smart steward forgave the creditor’s debts to keep his job.
Either way you look at it the scripture is clear here that a creditor can forgive a a partial part of the debt .
Hi Earl–There’s also the jubilee where the debts were to be forgiven. But we have to remember that today’s world isn’t the biblical world.
Thank you for this insightful article. Wow, God is changing my perception of debt. Excellent. Yet, there is a crucial Scripture on debt that came before the New Convenant. Many Christians discount the Old, but as Jesus said, He never came to destroy the law, but fulfill it. And again, He became a curse for us so we wouldn’t have the curse(s) of the Old Covenant, (but never did away with the blessings of them):
Deutoronomy 15:1-2 ” At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it: he shall not require it of his neighbor or his brother, because it is called the Lord’s release.”
Yes TM, the jubilee as I mentioned in a comment above. But again, that’s not how the world works today. Another thing is that in biblical times they didn’t have lenders for profit, today we have an enormous lending industry with very formal parameters. That’s why it’s so hard to draw direct parallels to the Bible, either Old Testament or New.
For me I would have to say it’s personal convictions. What does God want you to do? What should be done? For some it’s right to pay it all back and for other it might just be okay to pay partial.
There’s grace.
Hi J.L.–I agree, and that’s why this decision needs to be approached prayerfully. Everyone’s situation is different, and while this may be wrong for some, it could be the only way for others.
Just curious about this… Romans 13:7 says… [Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor.] So if the person I owed revenue to, writes off the debt (a forgiving of sorts) and then sells it for 10 cents on the dollar to some other company, I don’t really owe it to the new company. Above and beyond that, if that company purchases ‘stats barred’ debt in hopes of collecting something even though they have no legal entitlement to collect it – does this scripture apply here? Should I pay the original creditor even though they have written off the debt? I would consider the statute of limitations on legal debt collection to be a modern ‘jubilee’ of sorts. I am interested to hear your thoughts on this…
Hi SS–It’s not possible to give a biblically correct answer to all things debt. The lender-borrower arrangement looks a lot different than it did during biblical times. What you’re talking about here is credit factoring, but that’s an arrangement between the lender and the credit collection agency. This is just one of the many complications we have in lending.
But I think we have to be careful not to take too much license amid the complication. There are gray areas in lending, but I think that’s why we need to approach each situation prayerfully. We should be looking to do the right thing, not the easy way based on confusion. The system is confusing, and that’s why we need to keep our heads about us.
Great topic, and over all good article. I have to disagree with one point. I think retirement funds need to stay put. I see a lot of people who need to retire and can’t because they dipped into their retirement funds for one reason or another.
Another strategy to consider is to settle, understand what it does to your credit and with the relief in payments build your finances back up and pay the difference later when you have built up enough savings. Legally you are not obligated to pay the funds, but you may still feel you owe the funds from a biblical perspective – if so, you can pay the funds later. I am sure that if you knocked on your bank’s door 5 years down the road offering the pay the difference, they would accept it.
I teach personal finance, and one of my students, a pastor, found that he had to declare bankruptcy to survive. Once out from under those payments, he and his wife worked multiple jobs to put their finances is good shape with a strong savings plan. THEN they repaid every dime they owed to their creditors even though it was discharged in bankruptcy. THEN they saved and bought a house.
Just a strategy to consider.
Hi Marsha–That couple need to go on the lecture circuit! They’re a good example of a good example.
What about in the Bible where if I remember correctly, a king forgives the debt of a servant by is then angry when the same servant goes out and requests payment for a debt that is owed him? That sounds like there are times when debt forgiveness is ok when the lenders recognizes the borrower can’t pay and shows mercy.
Hi Sherrii–The lender always has the option to forgive a loan, in whole or in part. But that passage (Matthew 18:23-35) should make anyone who’s experienced debt forgiveness (or any forgivesss for that matter) be especially ready to extend similar grace to others. The king in that passage sets a very forgiving example, but the beneficiary of his mercy doesn’t do the same.
Hi Cherleen–Interest certainly distorts the balannce, but some loans do actually settle for less. Loans that become a problem early on are one type, medical bills are another.
Love your neighbor as your self, uh that means don’t shaft the other guy unless you like to be shafted. NEVER EVER IS IT right to ask for or demand less than or more than market price and no individuals do NOT determine market price! Go to e-bay if you have doughts and study similur transactions to find accurate market price. I have known many a so called Christian that REVEL in shorting their neighbor. Its sin and no “it was for my family” is not a get out of sin free card. Middle class Christians that so EASILY put their integrity on the shelf when it means making a buck is my all time extream irritant.
Hi Mike–I agree with you. What you’re describing in connection with debt is strategic default, which I completely agree is wrong, for a Christian or for anyone else. The complication comes in when someone can’t pay a debt, and I do think that survival is a legitimate consideration.
What we’re really trying to focus on in this post is the person who may have a legitimate reason to settle. That could be a person who, for example, was making $50,000, got laid off, then six months later had to take a job paying $30,000. His income may no longer support the debt taken in better times, and thats where the tough choices come into the picture.
God does not stutter on this. Do not become a debter. Sin is the problem.
If you chose to Ignore God please don’t go around telling the unsaved your a Christian. Frankly stay away from me as well.
Great post, when it comes to settling your debt, I like how you pointed out different alternatives, you should do everything in your power to make ends meet…whether it’s to get a second job or do a side hustle.
If you can’t make your payments after doing everything you can, you’ll eventually fall behind on your credit cards. There’s only so much you can do at that point.
But here’s the other question, if you fall behind on your bills, and your bills are sold to a collection company, and the collection company offers you a settlement at 50%, do you take it or offer them the full amount?
Hi Kevin–SS asked a similar question above. LEGALLY, if the lender sells the debt and the collection agency accepts less than the full amount, you’re in the clear. It’s always the lender’s perogative to settle a debt for less, and if they do you’re on solid ground.
I think there’s a problem from a faith perspective if you have the money to pay your debts in full but you allow them to go into default so that you can settle for less. But everything depends on the specific circumstances.
The best course is to avoid debt entirely so that you don’t have to face these decisions. I don’t think debt is a sin, but I do think it’s a very powerful temptation–which is anything that has the potential to lead you into sin.
Great article!
Word check: “Preverbal” should be “proverbial”.
#pedanticTeacher
Hi PJ–You’re so right! Good catch!
We were in high credit card debt and we went with a debt management company Nova Debt and added all debts up together and worked out a payment plan monthly it was tough but we paid every dime we owed back and the interest most reduced the interest rate but did not get rid of it a few company’s did and after 5 years we are debt free except our home and our car it’s a wonderful feeling and I felt like I owed that money I made the debts they didn’t ask me to charge up those cards… I feel you should pay the debt you owed