The New York Times had a strange article in today's edition about credit card companies beginning to aggressively settle with defaulted accountholders. Basically, if you're severely delinquent on your credit card balance, at some point the credit card company gives up on getting you to pay the full balance. That leaves them with few options: sue to possess your assets or settle for whatever you are willing to pay.
The article celebrates that, due to the severe recession, credit card companies are increasingly choosing the second option. The article is written with a sort of tone as if to say: you too can settle with your credit card company and get out of half of your debt! Isn't that great?
I don't think it is. For starters, I find it absolutely bizarre that the guy they feature is almost gloating that he failed to pay half his credit card balance and get away with it. In the picture, he has a sort of smug grin on his face as he sits in an expensive looking rocking chair (which may have been free if it was part of the half of his credit card balance he neglected to pay). He seems to be very pleased to have stuck it to The Man.
But what's worse is that the article entirely fails to explain that it is generally a bad idea to settle with a credit card company. Sure, it might be better than some other alternatives, like getting sued and losing. But a settlement is reflected in your credit history and represents a pretty ugly blemish on your credit report. Although it's hard to tell how many points on your credit score that might knock off, for years it will appear as a red flag on your credit report whenever you apply for a loan, lease an apartment or get a new credit card. I would strongly advise against settling -- try to first work it out through credit counseling or some other measure.
I'm not sure what's wrong with the world when people are gloating about not paying their bills. Shunning obligations and responsibility seems like a pretty tragic thing to become cool or trendy. I certainly hope articles like the one in the Times don't have that effect. But without disclosing the pitfalls associated with such behavior, I guess anything can happen
Awesome article! I have gradually become fan of your article and would like to suggest putting some new updates to make it more effective.
General Insurance Company
Daniel - you ignorant slut! Fuck the credit card companies. They have become no better than you average slum dog loan sharks and they know it! They realize that their predatory lending practices have been enslaving people and when they can't pay any longer they want anything. Well I agree with you not to settle, instead file BANKRUPTCY! Yea the B word. We all need a bailout not just the Bankers and auto industry execs. BK is the only way we working stiffs can get by. It took me about five minutes to get over the social stigma. Oh yea regarding my credit report - big deal! I still got a loan for a car. No it wasn't the best rates but BK doesnt' cause leporsy, despite what you've been told.
DON'T SETTLE, GO BK INSTEAD!
This situation bt the credit card companies and the defaulters reminds me of how I feel whenever to groups fight and I can't stand either. A pox on both their houses. Although if you read the article you would realize that the CC companies get a better deal doing this than when they sell the account to a debt collector.
Brian
You fail to realize something very important here and that is the fact that the credit card companies do nothing by chance or accident.
Of course they are willing to forgive what amounts to chump change because they know that in a few months this same man is going to come to them and ask for another credit card and guess what.. they will give it to him.
They will give him a new credit card but with a new APR starting at 20+%.
Credit has become our drug of choice, clearly in an economy where 70% of the GDP is consumer driven, so the credit card companies know that you will be back. They are literally banking on it.
Unfortunately, their are millions who are so pissed off at what has happened to our country and what government is doing that they believe that refusing to pay their debts is OK or perhaps that they are "getting back" at the corporations.
That idea is terribly misguided and will lead to more misfortune for those going down that road.
Going forward, financial institutions like banks and credit card companies will be able to cherry pick customers who need credit (scores over 700 only need apply) and the rest will get sky high APR or be rejected outright.
So, in the end it seems like the chair is all that the guy in the article comes away with.
You're kidding, right? Consumers who are settling with credit card companies are already delinquent, so their credit ratings have already been marked down. Settling, and paying a portion of the entire debt, is less damaging to a credit rating than never paying it at all and waiting to be sued or declaring bankruptcy.
Furthermore, you seem to believe consumers have some moral obligation to pay everything a credit card company says that they owe. Believe me, credit card companies have no moral compunction about unilaterally raising interest rates (to usurious levels), or changing payment terms or default criteria. To them, it's just business. And so it should be for consumers. Credit card companies make millions every year on exorbitant interest rates every year despite a known percentage of defaulting accounts. That's why they send out dozens of card applications to any person in the country who has an identifiable name, regardless of their credit history or likelihood of being able to pay back debt accrued.
Or are you opposed to the free market? Businesses routinely renegotiate contracts when the circumstances which led to the contract have changed. They do this, even though one side gets less than what it initially expected, because they realize it is better get something less rather than nothing, and it allows the relationship to continue, which means more money for everyone down the line. On what grounds would you deny consumers the right to renegotiate their agreements with credit card banks? The banks are freely entering into these new arrangements -- do you think they prefer getting nothing, or bankruptcy? And why shouldn't consumers negotiate the best deal possible for themselves?
Your advice makes sense for someone who has been paying his/her bill timely and is in a position to continue to make timely payments. For someone else who may be 60, 90 or 120 days behind, I think the concern over their credit report has probably gone out of the window!!!
For years, I paid my bills on time. However, over the last 2 years, my life changed dramatically. I lost my job (and, I still have not recovered). Faced with no other alternative, I filed for bankruptcy (and received a completed discharge of my debts). Once I accepted that I had to make some serious decisions regarding my financial situation, I let go of my concern over my credit report since my credit score had started to plummet and it was not going to stop plummeting any time soon. At that point, I did what I needed to do to give myself some piece of mind as well as to protect myself. I do not regret my decision one bit.
I agree with the author of this article, except for one niggling detail: the huge interest and fees that the credit card company charges that are hidden in the tiny details. I was out of work for six months. I continued to pay my minimum payment. However, during that time, my credit card company was bought out by another. I was informed that this was the case, but I was not informed that my monthly minimum had been raised and that automatic payment deductions from my bank had to be sent to a different address. Interestingly, the company I was still paying still cashed those checks even though my account had been forwarded to the other bank. The other bank just called me and told me I owe them $650 on the balance and that I have not paid for three months. I only spent $125 on this credit card and that was two years ago. Plus my bank statement shows that I have been paying, but not to them. So my credit is affected and now I owe $425 MORE than I originally spent, not to mention the two years in minimum payments I have been making? You gotta be kidding me. That's criminal. How much will I have spent for $125 by the time I'm done? Probably close to $1000. When I spent this $125, I did not forsee into my future that I would be without work for six months. Nor did I think that was an extravagent amount to spend on a credit card. Do you? I've probably already paid off that amount, plus interest over the last two years. I don't think there is anything morally wrong with me settling -- they've already made money off of me -- except that I'm the one who will suffer, not the credit card company.
PS- Why is it ok for the credit card company to be amoral (immoral?), but not the consumer the credit card company is taking advantage of? I would like the author of this article to explain this to me.
It’s not. Both should act morally. But even if the card companies don’t, as they say, two wrongs don’t make a right. And the reality of the situation is, by sticking it to The Man, you shoot yourself in the foot with a settlement blemish on your credit record that lasts many years into the future. I’m not saying it’s fair; I’m saying it’s reality. The system in place where consumers have virtually no power to challenge a credit card company’s claims regarding credit reporting stinks, and the so-called Credit Card Bill of Rights does nothing to remedy that.
BTW, to your earlier point: I have first-hand knowledge of the kind of companies that buy credit card accounts and then intentionally jack up rates and fees. I’ve met these guys, and they are not good people. So I fully agree. I can only hope that the recent legislation meant to curb such practices will be effective at ending them. Unfortunately, I’m skeptical.
The article misses the BIG PICTURE! When you settle your $10,000 debt with the credit card company for $4,000, the credit card company writes off the $6,000 loss and you can/will get a 1099-C for the forgiveness of debt.
The IRS views the forgiveness of debt as income for which you must pay taxes. (There is an exception now, for forgiveness of mortgage debt). When you file for bankruptcy, creditors cannot/won't send you a 1099-C, since that forgiveness of debt is not income (under bankruptcy).
See: http://www.irs.gov/pub/irs-pdf/f1099c.pdf
And, consult your lawyer, accountant, etc.