For years I have been emphatic that in a credit counseling or debt management repayment plan, it isn’t the interest rate reduction alone that is important, people need to get their monthly payments reduced. That’s more important.
New “Call to Action” debt management plans (DMPs) offer low or no interest rates to people who can qualify. In addition, the plans allow for people to be able to save from $25 to $200 a month while in these plans to help them build an emergency fund to tap in case of a financial surprise. Excellent!
A downside to these plans is that these special terms do not appear to be available to all people and some enrolling in a DMP that will pay a higher monthly payment or a higher rate of interest since they either won’t qualify or be approved by the creditor for these special Call to Action (CTA) concessions.
Consumers who can meet their monthly contractual payments with available cash, net of the emergency cash cushion, will not be eligible for a DMP; however, consumers whose available cash, net of the $200 cushion, is GREATER than a 2 percent fixed payment, but LESS than the full monthly contractual amount, WILL BE DMP eligible and must add that additional amount to the DMP fixed payment. Source: Association of Independent Consumer Credit Counseling Agencies (AICCCA)
According to the NFCC the criteria for enrolling in the CTA will be decided on a case-by-case basis by the counselor, with the final acceptance coming from the creditor. In a typical counseling session, after a thorough review of all sources of income, living expenses and current debt obligations, the counselor makes recommendations for resolving the financial distress. If the CTA is right for them, it will be recommended. The decision regarding which level to recommend is driven by the consumer’s budget and does not include additional criteria such as how delinquent the client is, or the amount of total debt.
I am also told by others that the consumer will be told by their counselor that they must liquidate any assets they might have to reduce the amount they owe to qualify for the CTA DMP.
If you are already enrolled in a DMP and have had a change in your financial situation, ask your counselor if you can now qualify for the CTA.
Creditors participating in this new selectively available DMP will waive late and over limit fees and adjust the APR so that DMPs will not extend longer than 60 months.
Not all creditors that have pledged participation are accepting people into these programs yet. They claim that they can’t since their computer systems are not setup to accept these special proposals. A typical excuse.
Despite what you may hear, these special DMPs are being are being extended to agencies within the NFCC, AICCCA and other independent true nonprofit agencies, not just NFCC and AICCCA.
| Creditor Name | Call to Action Standard Monthly Payment Percentage of Balance | Call to Action Standard Interest Rate | Call to Action Hardship Monthly Payment Percentage of Balance | Call to Action Hardship Interest Rate |
|---|---|---|---|---|
| Arrow Financial Services | 2.00% | 5.00% | 1.75% | 0.00% |
| Chase Card Services | 2.00% | 6.00% | 1.75% | 2.00 |
| Discover Financial Services | 2.00% | 6.99% | Pending | Pending |
| GE Money Bank | 2.00% | 7.45% | 1.75% | 2.00% |
| US Bank | 1.90% | 4.90% | 1.67% | 0% |
| Wells Fargo Card Services | 2.00% | 7.30% | 1.75% | 0% |
Let’s look at how this plan would give you some breathing room if you qualified for it. If you owed Chase $10,000 your monthly payment would be $200 in the regular Call to Action DMP and $175 in the hardship plan.
While it is fantastic to get a monthly payment reduction. I am not convinced that it is a significant enough reduction to make a big enough difference to give the consumer the greatest chance of successfully repaying their debt through the DMP.
It is still too early to report on a review of the effectiveness of these repayment plans but the NFCC states that an initial review will be available around the first part of August.
It will be interesting to see how these plans benefit consumers that want to repay their debt through a DMP. I think it is obvious that a creditor would prefer to not lower the monthly payment or interest rate any more than necessary. And ultimately the question of effectiveness will come down to one more rooted in behavioral economics, than DMP terms.
The longer that a consumer will need to repay with a tight budget, the higher the failure rate should be. Long periods of forced budgetary deprivation are hard to tolerate and thus more likely to fail. All you have to do to confirm this fact is look at the tremendous failure rates of chapter 13 bankruptcy plans that offer reduced payments and consumer protection from creditor collection actions, something the CTA does not offer. The vast majority of the chapter 13 bankruptcy plans fail and are either converted to chapter 7 bankruptcy and the debts fully discharged since the consumer could just not keep up on the payments for such an extended period of time or had a life or income change.
Call to Action DMPs are a step in the right direction but I’m concerned that acceptance still leavers the debtor with a very tight budget and that will be the failure point of an otherwise great step in the right direction for consumers.
The original NFCC / CCCS press release is below.
Responding to the “Call to Action” of the National Foundation for Credit Counseling (NFCC), the nation’s top 10 credit card issuers have agreed to provide additional relief to consumers struggling to repay their debts.
“This represents a significant action on the part of the creditors to take additional steps to help consumers, which is our collective mission,” said Susan C. Keating, president and CEO of the NFCC. “This will provide those in debt with more options to stabilize and rebuild their economic lives.”
For more than 40 years, consumers have avoided bankruptcy and benefited from repayment programs commonly referred to as “debt management plans” (DMPs) through which creditors provided some repayment concessions, including waiving late and over the limit fees and a reduction in interest rates. However, in these tough economic times, fewer consumers have sufficient income to be eligible for, or the ability to maintain, a traditional DMP, often leaving bankruptcy as the only option.
In response to a need to make better alternatives available to struggling consumers, the NFCC issued its “Call to Action” last fall, calling on more creditors to take additional steps to make DMPs more affordable for people in troubled financial circumstances. The NFCC also expressed its appreciation on behalf of struggling consumers to those card issuers already providing significant concessions aligned with the “Call to Action.” The “Call to Action” set the end of the first quarter of 2009 as the target date for adoption and implementation. Together with the “Call to Action,” the NFCC created a strategic partnership of NFCC Agencies and Association of Independent Consumer Credit Counseling Agencies (AICCCA) to work with the top 10 credit card issuers.
As of March 31, the top 10 credit card issuers have agreed to implement the changes necessary to provide both a more affordable “Standard” DMP and a “Hardship” DMP (together, the “Call to Action” DMPs) for consumers who are seeking to avoid bankruptcy, but who do not have sufficient income to qualify for a traditional DMP. The key elements of these two new DMPs will allow consumers to maintain a reasonable monthly budget, establish a savings account for economic emergencies, make fixed monthly payments more affordable, and be out of debt within 60 months.
Those creditors supporting the “Call to Action” are American Express, Bank of America, Capital One, Chase Card Services, Citi, Discover Financial Services, GE Money, HSBC Card Services, U.S. Bank and Wells Fargo Card Services. The NFCC urges all other consumer lenders to follow suit.
“Many consumers are facing serious financial problems, and they should be given every opportunity to qualify for an affordable program that meets their individual circumstances and that puts them back on the road to financial stability,” said Keating. “We applaud these creditors for recognizing the need to do more for consumers who are trying to avoid bankruptcy, and need some additional help with interest rate and fee waiver concessions so they can repay their debt.” Source: NFCC
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