The following guest post was contributed by Michael Bovee of Consumer Recovery Network.
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Banks are getting hammered for all of their missteps and risk taking that contributed to the housing bubble and subsequent burst. Unfair foreclosure practices; poor quality underwriting standards; packaging and securitizing subprime mortgages to investors; have been daily headlines for several years. Banks played a dominant role in what went wrong and indeed deserve to have captured the negative attention heaped upon them. Their patch work fixes and commitments when it comes to the housing part of the credit bubble have so far proven ineffective. Some would say their efforts are insincere.
While banks appear to be struggling to find the willingness to be active participants in repairing the issues related to securitizing and lending in the housing sector, they have exhibited a far different approach and willingness to handling another sector of the credit bubble; Massive credit card issuance.
During the credit boom, banks appeared willing to issue credit cards to anyone carrying a wallet or purse that could fog a mirror. The pre approved offers were often made with available credit limits far in excess of an individual’s ability to repay were the offer truly based on sound underwriting principles, as opposed to a computer algorithm driven credit score (FICO).
Stories abound that touch on how difficult it is to modify a mortgage, get payment reductions consistent with the ability to pay and stay in the home, get approval on a short sale etc. How banks are dealing with those unable to pay credit cards, from my view, is nearly the opposite. Banks in fact reach out in an extremely proactive way with a number of options available to the delinquent credit card borrower.
The willingness of banks in working directly with their credit card members who fall behind often begins immediately after a payment is missed. Don’t get me wrong, the lender is acting in its own best interest with its established loss mitigations strategies, but those efforts are often fair and measured to their card holder’s ability to pay.
Bank sponsored hardship plans for credit card debts
When the realization hits that you will not be able to meet payment obligations in a given month you may find yourself looking at what you can do to squeeze by. Often this means paying bills and/or purchasing necessities using credit cards. If the monthly cash shortage persists you may find you are unable to now keep up with minimum payments to the very credit cards you have relied on to get by.
Setting aside (for now) the warning signs of monthly cash flow lagging monthly obligations and commitments that may have been ignored; what can you do about the situation if you have recently fallen behind with credit card payments, or soon will.
The first step is to talk to your creditors about the situation. Yes, the same creditors who may have jacked up your interest rate in the past, or who may have already lowered your available credit limit to the balance you are carrying.
The same creditors that were reluctant to work out manageable payment arrangements with you while you were still current often have a different willingness to work with you once you fall behind.
When you miss a payment banks will start to reach out to you through phone and email almost immediately. Creditors know that frequent reminders that you are late increase the likelihood that they can get you to make a payment and potentially get the account back on track. Many creditors will offer lower payment arrangements within weeks of missing a payment while others won’t make those offers until you are a month or more behind.
The payment reduction plans offered are mostly due to their willingness to reduce your interest rate. Interest rate reduction plans are what have traditionally been available to over indebted consumers through credit counseling associations and their debt management plan products. Many banks will make direct offers to you with the same lower payment benefit, cutting out the middleman credit agency. In fact, the payments concessions offered by some credit card issuers may exceed the benefits available through that of nonprofit counseling group.
Depending on the bank, your financial ability to commit to a payment, how far behind in payments you are, a hardship plan may look something like this:
- Temporary hardship plans are typically set for 6 or 12 months. Your monthly payment can sometimes be reduced to 2 percent of your current balance. Your interest rate is reduced to anywhere from zero to 9%. Fees and penalties are often waived. When the plan expires your billing will reset to the pre-plan arrangement. This may be the temporary payment relief you need.
- Long term hardship programs became more common when the economy fell off a cliff. They are still made available by many of the larger credit card issuers today. Your balance will be frozen and the account closed. Your payment will be amortized over 5 years (60 months) similar to the temporary plans of 2 to 2.5% of the current balance set as your monthly payment.
Things you need to be aware of:
When you’re already behind in payments and you either call the creditor yourself, or pick up one of the many calls that will be placed to you in an effort to establish a payment plan, you will be asked qualifying questions. The questions center on your monthly income and what you pay out each month for bills. You may be asked what you pay for rent or mortgage; what you pay for cell phone, utilities, internet etc. How you respond will impact what plan you qualify for, or whether you are offered a reduced payment plan at all. If your monthly cash flow shows no money available after essentials are met, you obviously cannot reasonably commit to any plan, no matter how good the terms. If the income and expense exercise shows too much excess and available money, the payment plan offered may not be as favorable.
Additional benefit to a hardship plan may include:
Depending on how many months you have missed payments; your creditor may agree to “re-age” the account after 3 or more timely payments on the plan. This means they may consider removing the 30, 60 or even 90 day late pays from your credit report.
Hardship plans are typically only offered to those who are behind with their credit card payments. If you are current and call inquiring about a hardship plan you are basically saying you are at risk of defaulting on payments. This can result in their lowering your available credit limit or closing the account. If you still have options to meet your scheduled monthly payments, I would not recommend calling your creditors to discuss your hardship. This strategy should be reserved for the creditors you are unable to pay on time.
You may have multiple credit card accounts that you are trying to juggle.
Debt relief service providers such as credit counseling agencies (CCA) and debt settlement companies often have an all or nothing approach. You may have a creditor who will not accept a debt management proposal from a CCA unless all of your unsecured debt is enrolled in the plan. That same creditor may not take the same strict stance when working directly with you.
Debt settlement service providers will often advise you enroll all of your debts into the settlement plan in order to show creditors (during later negotiations) that you are in a true hardship and unable to pay anyone. While this is certainly a factor, there are strategies you can look to in order to keep small balance accounts out of a settlement program, or where creditor loss mitigation trending can be a key to your achieving debt relief while limiting your exposure to elevated collection risks (lawsuits).
Working on your own may allow you to be creative and successful in a way that will suit your needs best. For example:
You may be able to strategically enroll one or more of your higher balance or higher interest cards into a hardship plan while maintaining normal payments to others. Due to passage of the CARD Act, creditors can no longer arbitrarily raise your interest rates based on your payment performance with other creditors. This would not prevent them from lowering credit limits if, during a periodic review, they see that you are behind in payments to other creditors.
If you cannot meet current payment obligations, and a reduced payment plan does not provide the relief you need, contact a local bankruptcy attorney and also consult with a reputable debt settlement service provider such as members of the AACC.