Yesterday I pointed to a story about debt forgiveness. Today we're talking about forbearance. If you're in trouble, or think you might be heading for trouble soon, you should think about approaching your credit-card issuer. Many card issuers have little-publicized forbearance plans that are aimed at keeping borrowers out of default. Card issuers, meanwhile, are more willing than ever to work something out.
From Creditcards.com:Credit counselors and card issuers say that cardholders who lose their jobs, encounter medical emergencies or find themselves in other financial predicaments should contact their creditors before the situation becomes acute.
"Chase encourages consumers who are having problems repaying their debts to reach out to their creditors or a certified credit counselor for assistance and, when possible, before they fall behind on payments," said Gail Hurdis, a spokeswoman for JPMorgan Chase. "This will ensure the best possible arrangements."
One way or another, enormous numbers of cardholders are finding themselves in trouble and requesting assistance from card issuers.
The story doesn't mention this, but there is also help if you're an American Express cardmember. American Express has a hardship program that most people either don't know about or talk about. If you have an Amex card, and find yourself in trouble, don't forget about its hardship program.
You can read the rest of the story here (link).
Thursday, February 5, 2009
Credit Card Forbearance Programs Offer Reprieve From Debt
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13 comments:
Good info, as usual M. Thanks! I am going to pass this link on to a few people I know.
Nice seeing you, M. I figured you were lurking. And do pass this story to anyone who might be helped by it.
More consumers fall behind on paying credit cards
http://www.usatoday.com/money/perfi/credit/2009-02-04-credit-card-debt-overdue_N.htm
That's odd, the common wisdom up to this point has been that lenders won't work with you until after you fall behind.
Hopefully this is a new trend.
Clutch, with so many people falling behind, I think the card issuers have had to change their ways. When charge-off rates are 3-4%, card issuers don't worry too much about consumers falling behind. However, when nearly 8% of consumers fall behind, card issuers start to feel pain more acutely.
How many people that go into forbearance end up defaulting anyways? I'd imagine its pretty high and if it is high then it will just increase the loses in the long run. That is after all why they don't do this sort of thing under more normal conditions.
This could have more to do with balance sheets than any real change in heart. That is, they may be trying to push the loses into next year to improve their balance sheets today (There are tax issues too).
Although this may be a good thing for particular individuals overall its just more of the "lets close our eyes and pretend as if its going to be okay". Delaying the inevitable tends to make the pain worse both from an individual perspective and macroeconomic perspective.
Carnap, I'd like to see the numbers too. Wouldn't surprise me if this still ultimately ends badly for the person who does go into forbearance. Just putting off the day of reckoning.
And, yep, this is a way to push out losses for the card issuer. I have no doubt that banks have something to gain here.
Yeah they have something to gain, but the question is in what way? I really don't know the answer but I think the general public thinks that things like forbearance 'make sense' and think the companies are evil and/or stupid for not allowing it and are now 'seeing the light'.
But I doubt that is what is going on here though.
Carnap, I don't know what the motive is, but I am positive that these card issuers didn't get nice overnight. They aren't doing because they've seen the light (as you said).
Interest continues to accrue in these forbearance situations. If the borrower regains his footing, great. The lender reaped interest income and got the principal repaid. If it doesn't work out, the lender ultimately records a loss.
The card issuer is taking a shot before a loss is eventually realized (assuming repayment doesn't work out). No harm, no foul, I suspect.
"The card issuer is taking a shot before a loss is eventually realized (assuming repayment doesn't work out). No harm, no foul, I suspect."
If there truly was no "no harm, no foul" then credit card companies would've been doing this years ago. Even if the success rate was low it would still increase their profit assuming there was "no harm, no foul" in doing forbearances.
I really don't know the details, but there are some obvious costs in doing a forbearance, such as increased customer service costs, costs associated with keeping an inactive account open. There is also an opportunity costs in a sense as the charge-off is worth something in the form of a tax deduction. But having an annual loss can change the value of such things which is why I suspect they are changing their policies.
Anyhow, either the credit card companies are stupid or there are some definite costs (i.e., "harm") associated with forbearances that out weigh any benefit.
Regarding "harm and foul", what I suspect is the biggest issue in terms of cost is simple loss minimization. If you suspect someone has a good chance of defaulting (and asking for a forbearance would certainly give you that idea) than the best strategy to minimize your loss is to bleed them for as much as you can while they are still paying.
How many people that ask for forbearance stop paying after it is rejected? What is the average percentage (of the balance) that gets paid off in these cases? etc.
No such thing at Chase. No help either, just market conditions.
Don't enroll in the American Express hardship program because it potentially will screw up your credit score. I enrolled in this program two weeks ago for my Amex Platinum. American Express decided shortly after to review my account and set a credit limit of $5,000 on my previous unlimited card. Guess what, I have a open balance of $20,000 and my credit report that was previous clean is now showing that I overextended this card with $15,000. I would never have enrolled in this if I had known this before.
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