CHESSNOID

Until you actually see it happening, it isn’t real.  For the most part, when you start to hear about it, chances are it is being leaked out from a real source and has a high probability of happening.  The latest article I read from the New York Times by Eric Dash makes it closer to reality.

In an unusual alliance, the Financial Services Roundtable, one of the industry’s biggest lobbyists, and the Consumer Federation of America recently proposed a credit card loan modification program, which was rejected by regulators.

Under the plan, lenders would have forgiven about 40 percent of what was owed by individual borrowers over five years. Lenders could report the loss once whatever part of the debt was repaid, instead of shortly after default, as current accounting rules require. That would allow them to write off less later. Borrowers would have been allowed to defer any tax payments owed on the forgiven debt.

Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.

Borrowers should not expect sweetheart deals. Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule.

While a deal may help avoid credit card cancellation or bankruptcy, it will also lead to a sharp drop in the borrower’s credit score for as long as seven years, making it far more difficult and expensive to obtain new loans. The average consumer’s score will fall 70 to 130 points, on a scale where the strongest borrowers register 700 or more.

For the moment, it may be easier for troubled borrowers to start negotiating a modification by contacting the card company or collection agency directly. Credit counselors can help borrowers consolidate their debts and get card companies to lower their interest payments and other fees, but they currently cannot get the loan principal reduced.

I think this is really no different from the housing bubble bust. In real estate, lenders had a hard asset. In the credit card bubble bust, lenders have a signed piece of paper. Yes, the credit card companies can sue you for not performing on the contract, but most people who are behind on credit cards have defaulted on multiple accounts from multiple companies.

Another hurdle credit card companies face in collecting is that suing does cost money. On top of that, they will want to litigate only on suit worthy customers. Now that the biggest asset consumers own (their home) have dropped in value, the next asset creditors look for are employment so they can garnish wages. Again that only happens after a judgment is rendered by the court which is a process that doesn’t happen overnight.

The volume of credit card defaults are spiraling faster than the the housing bust, so credit card companies are having a more difficult time in trying to service all their accounts in default.

There was a bankruptcy reform done a few years back to make it harder for consumers to file chapter 7. However, with house prices down and many people losing jobs, I don’t think it would be hard to get the courts to approve the bankruptcy (no assets + no job = no payments to the credit card companies).

I do see a credit card bailout becoming real, although it is very misleading. Credit card companies are trying to squeeze out as much as they can from consumers, but if the consumer files bankruptcy the entire debt is written off. The credit card companies (not the consumers) are actually getting the benefit from the credit card bailout, since they get paid 40% of the balance from the consumer, and will somehow try to recover the difference of the balance through tax payer’s money. Personally, I don’t think the credit card companies should get a bailout which is what this would really be.