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hhttp://www.nytimes.com/2009/06/16/your-money/credit-and-debit-cards/16credit.html?_r=1&em&emc=eta1
Credit Bailout: Issuers
Slashing Card Balances
By DAVID STREITFELD
Published: June 15, 2009
The banks were bailed out last fall, the
automobile companies last winter. For
Edward McClelland, a writer in Chicago,
deliverance finally arrived a few days
ago.
Mr. McClelland’s credit card company was
calling yet again, wondering when it
could expect the next installment on his
delinquent account. He proposed paying
half of his $5,486 balance and calling
the matter even.
It’s a deal, the account representative
immediately said, not even bothering to
check with a supervisor.
As they confront unprecedented numbers
of troubled customers, credit card
companies are increasingly doing
something they have historically
scorned: settling delinquent accounts
for substantially less than the amount
owed.
The practice started last fall as the
economy worsened. But in recent months,
with unemployment topping 9 percent and
more people having trouble paying their
bills, experts say this approach has
risen drastically.
They say many credit card issuers have
revised internal guidelines to give
front-line employees the power to cut
deals with consumers. The workers do not
even have to wait for customers to call
and ask for a break.
“Now it’s the card company calling you
and saying, ‘Let’s talk turkey,’ ” said
David Robertson, publisher of the credit
industry journal The Nilson Report.
Only a few creditors are willing to
confirm the practice. Bank of America
and American Express say they decide on
a case-by-case basis whether to accept
less than the full balance. Other card
companies refuse to discuss the subject,
but their trade group, the American
Bankers Association, acknowledges that
settlements are becoming more common.
The shift comes as the financial
services industry finds itself losing
some of its legendary power. A credit
card reform bill that makes it harder to
raise rates on existing balances and
prevents certain automatic fees flew
through Congress and was signed by
President Obama in late May.
Borrowers still have a crushing amount
of debt to deal with, however.
Revolving credit, a close approximation
of credit card debt, totaled $939.6
billion in March. The Federal Reserve
reported that 6.5 percent of credit card
debt was at least 30 days past due in
the first quarter, the highest
percentage since it began tracking the
number in 1991. The amount being written
off was also at peak levels.
After a balance has been delinquent for
six months, regulations require the card
company to reduce the value of the debt
on its books to zero. If a borrower has
not paid by this point, chances are he
never will.
“The creditors would rather have a piece
of something now instead of absolutely
nothing down the road,” said Adam K.
Levin, the founder of the consumer
education Web site Credit.com.
Banks and credit card companies are
discussing new programs that would, for
the first time, allow credit counselors
to invoke reductions of principal as a
routine part of their strategy, said
Jeffrey S. Tenenbaum, a lawyer for many
counseling agencies. In the past,
counselors could persuade card issuers
to adjust interest rates and modify late
fees, but the balance was untouchable.
An example of how quickly the card
companies are shifting their approach is
in the behavior of HSBC, a major issuer,
toward Mr. McClelland.
He was paying fitfully on his card,
which was canceled for delinquency. In
April, HSBC offered him full settlement
at 20 percent off. He declined. A few
weeks later, it agreed to let him pay
half.
Traditionally, the creditors could play
tough with any accounts that became
delinquent because the cardholders had
assets. The creditors could sue or place
a lien on a cardholder’s house.
As the recession grinds on, though, many
cardholders have less to lose. Mr.
McClelland, 42, is a renter. Since he is
self-employed, he has no wages to
garnish. But he did not want to feel
like a deadbeat.
“Having this over and done with was
appealing,” he said. He raised the
agreed-upon $2,743 and sent it off
electronically last week. He has spared
himself the prospect of years of
collection calls.
HSBC said it did not comment on
individual cardholders and would not
discuss its policy toward settlements.
“Every customer situation is unique,”
said a spokeswoman, Cindy Savio.
The card companies, perhaps
understandably, do not want to promote
the idea that settlements have become
merely a matter of asking nicely. The
creditors also point out that a
delinquency, like a foreclosure,
destroys a credit record.
And there can be a Catch-22: those with
the fewest assets are the likeliest to
receive a settlement offer, but they are
also the least able to come up with the
cash for that final negotiated payment.
Some creditors, though, are helpfully
letting people stretch this out over
months.
Still, a line has been crossed, credit
experts say.
“Even in the early stages of
delinquency, settlements can be
dramatic,” said Carmine Dorio, a
longtime industry executive who ran
collection departments for Citibank,
Bank of America and Washington Mutual.
During the boom, nonpayers were treated
more harshly because, paradoxically,
their debt was more valuable. Collection
agencies were eager to buy bundles of
old debt from the card companies for as
much as 15 cents on the dollar. In a
healthy economy, even the hopelessly
indebted can pay something.
In this recession, where collection
agencies have little hope of collecting
from the unemployed, that business model
is suffering. Experts say 5 cents on the
dollar is now the most a card company
can hope to get for its past-due
accounts.
Another factor undermining the card
companies is the rise of debt settlement
firms. These are profit-making companies
that charge fees, nearly always in
advance, to bargain with creditors on a
consumer’s behalf.
Settlement companies are under fire from
regulators, who say they promise much
and deliver little. But their ubiquitous
ads, which make a settlement seem not
only easy but also a moral victory over
shamelessly gouging card companies, have
done much to spread the idea.
Although there are few independent
statistics on the settlement industry,
there is no doubt that some generous
deals are being done.
Consider Bedros Alikcioglu, a gas
station owner in Newport Beach, Calif.
He owed $112,000 on four cards and was
paying $3,000 a month in interest and
late fees. “It was so hard to earn that
money, and paying it to nowhere didn’t
make sense anymore,” said Mr. Alikcioglu,
75.
He signed up with a debt settlement
company named Hope Financial, which
negotiated deals with his creditors to
settle for about 35 percent of his
balance. Hope Financial is charging Mr.
Alikcioglu about 12 percent of his
original debt.
“I did not want to leave the legacy of
bankruptcy,” Mr. Alikcioglu said. “I am
now at peace.” |
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