Banks Will Take Less Than You Owe In Settlement

Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.
 
So what does that mean for the consumer?
 
First of all, if you are behind on your credit card payments and you can't see a way to catch up, now is an excellent time to call your card company and negotiate a cash settlement. It's probably a good idea to use a non-profit credit counseling service to assist you in coming up with a proposal that is reasonable and a plan for how to pay it.
 
Because of a change in the FAS, banks will be required to bring "off the book loans" and put them "on the books". It has been a common practice for banks to bundle credit card loans into an investment vehicle and sell them to the market. These loans, because they are investment vehicles, did not have to be shown on the bank's balance sheet.
 
Banks are regulated and are required to keep a certain percentage of outstanding loans as a cash reserve for defaults. If the loans are "off the books" they are not included in the balance sheet and therefore the bank does not have to keep a reserve on them.
 
Bringing these loans back on the books is going to have a significant impact on the amount of cash a bank needs to cover the reserve. To give you an idea of the magnitude of this rule change, American Express says it will have to add $28 billion in loan liabilities while Citigroup says it will have to add over $98 billion! Didn't we just bail these guys out?
 
Adding those kinds of numbers to their outstanding loans will mean that the cash reserves will have to be increased by billions of dollars. Consequently, banks are open to consumers negotiating a lump sum settlement. If a bank can get $700 on a $1000 balance, that's $700 that they don't have to hold a reserve on and that makes them motivated. Motivated to the point that some banks are actually calling the card holder first and they are calling themselves rather than hiring collection agencies.
 
There really is no downside for the consumer. By being late on the payments, the consumer's credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.