Record numbers of Americans are falling behind on their credit card bills, but for many debt-laden consumers, there's an upside. Increasingly, banks are negotiating with debtors, and, in some cases, they're willing to take substantially less than what is owed.
Banks modifying consumer loans isn't new. In 2008, 2.7 million credit card loans were modified in some manner, according The Nilson Report, an industry journal. It is widely expected that debt holders will alter the terms on even more loans this year.
"Modifications, in a general sense, have gone up lately," said Peter Garuccio, a spokesman for the American Bankers Association. "One of the observations from the mortgage crisis is that there, perhaps, wasn't enough reaching out to people that looked like they might be in trouble."
Debt 'forgiveness'
This time, burned banks and credit card issuers are initiating the discussions. Companies such as Bank of America are agreeing to reduce monthly payments and interest rates for clients who are facing financial difficulties or have sustained blows to their incomes. In some cases, banks are even forgiving a portion of customers' outstanding balances."We evaluate the individual customer situation, and, based on that, we propose solutions. . . . We might reduce the monthly payment, eliminate fees, or we could refer the customer to a debt management program," said Bank of America spokeswoman Betty Riess. "On a case-by-case basis, we also may settle for less than the full balance."
A recent article in The New York Times included the account of one Chicago man who'd had his $5,486 balance cut in half.
"If you just let them know you lost your job, the likelihood is pretty darn high that they will just believe you," said David Robertson, publisher of The Nilson Report. "In this day and age, everyone is functioning within the reality that once someone loses their job, it is pretty much over. You are not going to get money back out of that person until they get another job."
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By law, a bank must write off a loan as a loss if a customer fails to pay for six months. Though the bank may still try to recover a portion of the money through a collection agency, the bank knows it will likely receive less than a nickel on the dollar at that point, Robertson said.
Banks are competing for whatever cash is left
Competition for consumers' available cash is perhaps an even bigger driver of loan modifications. Banks know that each customer who is late paying a credit card bill likely has other outstanding credit card balances with rival banks. In fact, most consumers have more than one credit card, and one in seven has 10 or more cards. Consumers who seek debt counseling have an average of 62% of their annual income on household credit cards.The goal in modifying a loan, said Robertson, is to ensure that the customer chooses to pay back the flexible bank the most money possible, rather than spend whatever money he or she has satisfying another debt obligation.
"This is not a win-win situation," said Robertson. "One issuer will win, and another will lose."
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Continued: No easy money for consumers
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