Credit Card Debtors Can Make a Deal

If you are delinquent on your credit card account, you don’t have to wait to hear from your lender. Consider contacting your credit card issuer directly to try negotiating a settlement.

Possible plans include:

• A lump-sum settlement, in which you and the lender agree to a reduced balance, and you pay that off at once.

• A work-out arrangement, in which the bank cuts or eliminates your interest rate and (often) stops issuing late fees and other charges until the balance is paid

.• A forbearance plan, which offers a few months without payments until you get back on your feet, but does not reduce the balance owed.Credit card issuers are increasingly offering settlement deals to delinquent borrowers, in an unprecedented attempt to salvage a fraction of the account balances they are owed.

Carol Kaplan, a spokeswoman for the American Bankers Association, calls this move by banks “a fairly recent development.” With cash-strapped consumers facing high unemployment, record home foreclosures and shrinking personal wealth, banks are trying to curb widespread default on credit card debt.  “We’re seeing the nearly highest delinquency rates on record, and we do expect it to get higher,” Kaplan says. “What banks are doing is very prudent. They can either not get paid at all, or get paid something. I don’t know that we’ve ever seen such a proactive approach at stemming losses.”

The increase in delinquencies over the past year has been dramatic. While only 1.32 percent of bankcard holders were at least 90 days late on a payment in the first quarter of this year, that marked a steep 11 percent climb from a year earlier, according to TransUnion, a credit-reporting agency.

And it looks like the squeeze will continue for some time. TransUnion predicts that credit card default rates won’t peak until early 2010. At that time, unemployment is expected to fall and the drop in disposable income should level off, so debt may become more manageable, the agency says.

Meanwhile, credit card issuers have written off billions of dollars in bad debt in the past year.

No easy street

 “Issuers are becoming much more accommodating, even though they don’t wish to admit it publicly,” says Adam Levin, cofounder and chairman of Credit.com, a consumer and education website. “Their chance to get anything is enhanced by moving quickly as people lose their jobs.“But this shouldn’t be viewed as easy street,” he says. “There are ramifications to these settlements. You’ll take a hit on your credit score—it’s the highest negative you can get on your report.”

You also have to pay taxes on the amount of debt that is forgiven. “The general rule is that anytime debt is forgiven, it’s considered income to you” says Bill Smith, national tax director with the business consulting firm CBIZ MHM.

“It’s always going to be a good deal,” he says, because the tax bill is less than the amount of debt owed.“ The problem is that it comes as a surprise because people don’t think they have to pay anything.”

Avoiding a suit

A negotiated settlement also prevents issuers from filing suit against you for the debt. If a suit were filed, you’d be responsible for the balance due and interest, which could accrue until the debt is repaid.