2009 - The Year of Debt Forgiveness?
Jan 3rd, 2009 | By Rob | Category: debt
The New York Times has a great article today about the effect of the current economic climate on the ability of credit card companies to collect on debts and their willingness to decrease interest rates, waive payments, and participate in partial debt forgiveness.
I think that the article is worth reading in full (click here), but for those that aren’t interested, here are the highlights:
- In the current deteriorating economic climate, credit card companies have realized that many consumers won’t be able to repay all of their debt. Because credit card debt holders will be lower in priority than secured creditors in bankruptcy proceedings, they are choosing to compete with each other to recover money from debtors prior to bankruptcy rather than roll the dice on what little, if any, there will be left over for them.
- For a debtor in trouble, creditors are more understanding than ever. Creditors are offering to forgive 20 to 70 percent off of debts for troubled borrowers. Credit card companies are accepting pennies or dimes on the dollar for debt settlement. They already attempted to garner government support for a partial debt forgiveness program. For example, Bank of America said that it “has waived late fees, lowered interest charges and … reduced loan balances for more than 700,000 credit card holders in 2008.”
- Credit card companies are anticipating chargeoffs for bad debt in the next five years to increase by 50% over the amount of credit card debt written off over the previous five years.
- Although debt holders may be more willing to negotiate reductions in debt, consumers shouldn’t expect “sweetheart deals.” The price the consumer will pay for the forgiveness of debt lies in the cost of future credit. The average credit score of a consumer will fall 70 to 130 points from striking a deal with their credit card company.
