Credit card companies are next in line to feel the credit crunch. Credit card companies say that their charge-offs of delinquent debt from card-holders have spiked to 5.5 percent, and could jump to 8 percent in coming months, a level not seen since the dot-com bust in 2001, according to Washington Post.
Banks considering debt settlements for cardholders
USA Today reports that banks are proposing that they forgive up to 40% of the credit card debt owed by the most financially stressed consumers, who are close to bankruptcy. These consumers would then get five years to pay off their remaining card debt, interest-free. Banks would pilot this program with 50,000 consumers, in hopes of expanding it to tens of thousands of others to avoid their debts being lost all together through a bankruptcy.
We’ve known for years that debt settlements is a very sound solution to critical credit issues. Banks have always been resistant to debt settlements but now, they may have little choice. It’s a simple question really. Would you rather get half or lose it all?
Banks seem to finally have their heads out of the sand on this issue and this could be great news for consumers. One, it will cause consumers to think twice about filing for bankruptcy if the banks are willing to work with them, and two- banks will decrease their total charge off amounts by recouping at least half of the debt.
“With consumers losing their homes at record numbers, the last thing they are worried about is credit card debt. If they are already in a position to lose their biggest (secured) asset, their home, then the credit card debt will do little to jar them. It’s unsecured and much easier to discharge in a bankruptcy”, says Credit Expert, Kristi Feathers.
Bully Debt Collectors
The other issue that’s going to be at hand here is the on-slot of debt collector abuse to consumers with accounts referred to collections. Debt collectors are probably a few of the only businesses thriving in this downturn and they will be all over these debtors, and that is going to cause more complaints nationwide to groups like the FTC.
Right now, consumers with credit card debt mounting and considering bankruptcy need to contact the card issuers and try to work out a debt settlement. They should explain their situation and see if a 40% debt reduction is possible and above all, get these agreements in writing.
A settled debt on a consumers credit report is much better than a charge off and once the debts are settled, the consumer can focus on rebuilding their credit from a stronger standpoint. Remember, settled debts will show paid whereas a charge off is unpaid, so that’s motivation in settling your debts if you are able.
At least with the banks being open to the idea of debt settlement, you have an advantage that once was harder to achieve.
Remember the following;
- Get all agreements in writing with your creditors/collection agencies
- Follow up with the credit bureaus to make sure debts are reported accurately as “settled” not “charged off”
- Be sure to ask the creditor to also settle the rating from paid collection to settled
- Try to handle the issue BEFORE its assigned to the collection agency
- Educate yourself on debt settlement issues (you can do so here free)
- Report any abuse by debt collectors to the Federal Trade Commission at FTC.gov
- Keep a log of all your communications with creditors and collectors
- Use DIY help if needed (FDCPA, FCRA)
If you credit card issuer isn’t willing to settle or If you are not in a position to settle your debts, you can contact a credit counseling firm to spread your payments out, reduce interest and fees, and help you get breathing room. Debt settlements is different from debt management.
