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| Tips on Credit Card Debt Settlements |
Submitted by:
Ray @ TipHero 06/16/2009 3:25 PM
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 A recent article in the NY Times "Credit Bailout: Issuers Slashing Card Balances" highlighted a new development: banks becoming proactive in settling delinquent credit card balances. The article highlighted the story of Edward McClelland, a writer in Chicago, who proposed paying half of his $5,486 delinquent credit card balance. The bank representative immediately accepted the offer on the spot without checking with their supervisor.
The article went on to posit that banks are becoming much more proactive in settling delinquent credit card balances with bank representatives being able to make on the spot decisions on whether to accept a proposed settlement offer. Often now card companies are calling delinquent accounts and offering to discuss settlement terms, something that rarely happened in the past.
The 6 Month Mark
One interesting piece of information in the article caught my eye: "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" This is a critical point because central to the banking crisis is banks not wanting to mark-down assets because it lowers their stated capital. If their capital levels fall low enough, regulators force them to raise capital, most likely through selling equity which hurts existing shareholders, including bank management, because their existing shares are diluted.
Once banks are forced to mark down the value of a delinquent cardholder's debt to zero after six months they can increase their stated capital by settling with the cardholder. For example, if the cardholder and bank agree to accept $5,000 to settle a $10,000 debt, the bank can immediately increase its stated capital by $5,000. In the bank's eyes, recovering some money and raising capital through a settlement is much better than raising capital through a sale of equities and diluting all existing shareholders. In short, I would assume banks are highly motivated to accept a reasonable debt settlement offer from a cardholder after the magical six month mark. The alternative for the bank is to sell the debt to a collections agency for pennies on the dollar.
The Worse Off You Are...
The article also highlights the somewhat obvious: That those with few assets and no employment are the most likely to receive a debt settlement. Credit Card companies have two main tools to recoup unpaid debt: (1) They can put liens on your property and other assets and, (2) They can garnish your wages. If you have no assets, or you're underwater on your home and have no job, or you're self-employed, the bank is in a much weaker position and, as such, is more willing to forgive a larger part of the debt.
Bank Settlement Models
I would assume most banks are using models to determine which cardholders are eligible for debt settlements and how much debt they are willing to forgive. As mentioned above, these models take into account the amount of time a cardholder has been delinquent on his debt with six months being a key milestone. The model will also take into account your assets and employment and will also take into account the number of other credit card accounts you're delinquent on. These models most likely spit out the amount of debt a bank representative is able to approve on the spot.
My gut tells me that as credit card delinquencies grow, card companies will become even more aggressive in seeking debt settlements with cardholders because banks will be competing with one another to receive some of their money back on delinquent loans. It's far better to get 50 cents on the dollar through a debt settlement with the cardholder than sell the debt to a collections agency for 15 cents on the dollar.
Photo credit: Andres Rueda
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