Bad Debt, Bad Credit: Re-age, Repay, Repair
Mar 5th, 2009 by RSmitty
Proactive solutions to bad debt, RSmitty’s proposal.
Consumers are barely treading water in massive debt. Mortgages aside, much of that is tied to credit cards. Univeral default has compounded the problem immensely. Bankruptcy is always an option. Some run to it, others wring their hands, lose sleep, and suffer under tremendous stress over the thought. Even in a seemingly hopeless situation with no light visible, bankruptcy is so much a final option to some people, they won’t accept it until literally forced into it.
(More after the jump)
There are programs available today to help consumers with even minimal ability to make arrangements to pay their creditors with reduced payments and reduced interest. Programs, like the repayment program offered by the Consumer Credit Counseling Service are very good and very trustworthy programs (do your own due diligence, though, there are also unscrupulous groups as well). There is, of course, a downside, in that this type of repayment is a knock on your credit score, to a certain extent, and they do work in a payment for their services. On the credit score, a person needs to consider that this knock is far less severe than bankruptcy or charging-off. On them receiving payment via the monthly remittance, they are non-profit, and very legitimate, so this payment they collect for their services is strictly for covering costs. Additionally, they also receive payment from creditors, a reciprocal service for them bringing consumers back to the table, so there is some willingness on the part of the creditors.
Creditors’ willingness to work with CCCS on low-payment programs should be proactively extended to direct programs between creditors and consumers in this economic environment. My idea does not intend to undermine the fine efforts of groups such as CCCS. My idea is for these struggling creditors to regain some of their potential, staggering losses, while also helping the struggling consumers, on their way to isolation time in debtors prison, to regain their footing and start climbing back up that ladder, off the path to debtors prison.
Here’s the deal. CCCS has experienced lack of cooperation from creditors when the proposed monthly payment falls less than 1% of the balance of the debt. So, John Doe’s DefaultRate Credit Card has a $20k balance and his OverHisHead cash line also has a $20k balance, for a total of $40k. John Doe’s finances are such that he only has $100 to put to these bills ($50 per creditor). Obviously, that is a bad situation for John Doe. His creditors are flipping out, too. Not enough in their eyes. Whether JD pays the $50 or not, he gets treated as he makes no payment at all. Literally, he could use the $50 with greater utility elsewhere. CCCS steps in and works with the creditors, but the creditors will not accept that low of a payment. JD is out of luck, even though he wants to do the right thing with what little he has.
I think creditors of debtors way over their head (or anyone in trouble) can do some things to keep their chargeoff rates down and keep their debtors above the debtors-prison line and put them in a spot to recover quicker. Going back to John Doe, both creditors can work out that JD pays the $50 a month with 0% interest for the first 12-months. That keeps the account CURRENT and the creditors start receiving payment from an account that was otherwise uncollectable. JD managed to pay at least $1200 off of his debt in this period.
Then, the next 12-24 months, they get to re-work the arrangement with JD. The intent is to determine if JD can up his payment to them. The creditors have a right to earn money on these loans, so they get to tap 1% APR interest for this period and add that to that $50 monthly requirement. Ultimately, it would be good if JD could pump up his principle payment, but $50 remains the requirement. Oh, that interest? For daily compounding and using the combined $38800 remaining balance, that one month of interest (the 13th month overall) would be $31.90, or $15.95 per debt. Whether JD still pays only $50 per creditor or $65.95 ($50 + interest), he is still paying the principle down. The interest can be incremental, per YEARLY review, but should not increase any more than one-percent increments. There would need to be an end-time, of course. Five years, ten years? I don’t know, but there has to be a goal. This goal will either be a payoff or exit from the program and a return to a normal repayment agreement. This idea is kind of a hybrid of a Chapter 13 bankruptcy and a CCCS payment plan, but without the damage of a bankruptcy or the stubborness of creditors for a very low payment. To do this, though, I think it is very reasonable that access to the affected credit lines are closed and to require the debtor to attend credit counselling. The current bankruptcy laws require such a course before a petition can be filed. A certificate is issued to the debtor upon completion. It can be attended in-person or on-line, as well.
It’s a slow process, but it’s progress. The intent is to get both the debtor and creditor through a bad time. The debtor doesn’t land in the worst of a credit-rating-wasteland and the creditor stops projected losses short. Make this program to at least a million JDs and creditors just likely prevented hundreds of millions, if not more, from going uncollectable, and collecting it maybe at a rate of tens of millions per month. Not only would this help out the JDs out there in the long run, think what it will do to these creditors that can’t lend anymore because of the credit market. Think of what it would do in the longer run with creating liquidity for NEW JOBS!
Really, this is a ball landing square in the creditors’ court. It’s a way out for all involved and gives long-term optimism to a bleak economic picture. I think it’s worth investigating. Biggest issue now, getting someone that can make this decision to consider it!
Thoughts?
Smitty
I’ve posted before on my own experiences with CCCS, which have been positive, but here’s the most important thing I learned from them:
If you can’t pay all your bills (for whatever reason, I’m not judging), the most vocal complaints will come from your unsecured credit cards. They will literally hound you.
And they are the people you should pay last.
All they can do is call you (and there are limits to that; see below) and mess up your credit score. Which you can challenge.
Your mortgage company can take away your home. Your bank can take your car. The electric company can cut off your power.
What CCCS taught me is: always pay secured debt and utilities FIRST. Let the credit card agencies scream; it is literally all they can do in the short term because it is unsecured debt. Medical debt is similar. In the time frame of six months to a year there is not much they can really do to you if you just stop paying.
How to get them to stop calling: tell the person on the line that their calls are causing you “emotional distress” and that you want them to communicate with you from here on out via letter. That person will equivocate. Demand to speak to their manager, and get pretty upset. Use the exact words, “your calls are causing my family emotional distress.” If they do not stop calling you at that point they are violating the law, and if you keep notes about doing it, they will almost never manage to the collect the debt, either.
The other thing you need to know is that collection agents are not, by law, required to tell you the truth. You should accept NOTHING they say as correct, and you should NEVER give them an immediate payment over the phone. If they tell you there is a one-time-only opportunity to pay a reduced rate over the phone, challenge them on it.
You also have absolutely no legal obligation to speak with anyone who tells you than your call is being recorded or monitored. If you do not refuse to do so, you have given implied consent to having your call recorded. You can refuse to speaking without recording and then they will hang up, because they cannot talk to you under those circumstances and they cannot turn off the recording.
You are under no legal or moral obligation to play more fair with these folks than they play with you.
Good points, Steve. However, this wasn’t a continuation of my lament from a couple of weeks ago. Rather, this was a thought on how something, even if small in the big picture, could actually “stimulate” any part of the economy, without the government having to push funds one way or the other. Just as in the example I gave, take one million JDs, paying $50/month to a creditor, then you have $50 million going to cover consumer debt…$50 million that was otherwise uncollectable and further eroding the bottom line, which restricts liquidity, resulting in stagnant or negative growth, leading to cut-backs, job loss, and the dominoes fall onward.
That was really my point I tried to make. All things considered in today’s economy, I seriously think unsecured creditors should take a hard look at a significant slow-pay plan like this. It still beats losing a debt to chargeoff, and it probably would beat what they’d get for selling it off to a third-party. The debtor, in turn, starts to salvage his/her credit-worth and could return to a favorable level quicker than what otherwise would have been.
OH! A big OH! It also then gets the government out of the business of propping up industry with virtual cash.
Ouch, sounds like a stressful place to be. I wonder how much credit cards companies can afford to hound if millions more new debtors need to be hounded?
Who do you blame? The 28% loan sharks, Delaware overturning usury laws, or the consumer who can’t resist the bait? I say blame the system that feeds you debt at almost impossible to pay rates. That house of cards is falling, I hope we get back to basics – including age old concepts like usury and why the Government has a duty to regulate rates and terms.
On the subject of debt and bankruptcy, it’s one thing for a family who borrows for a Land Rover and plasma TVs to go bankrupt, but the outrage is the family that goes bankrupt because they need medical treatment. We are the only country left in the world where that can happen.
If I were supporting a policy change, one of the changes I would make is to allow people receiving unemployment benefits to declare an “unsecured credit repayment holiday” that allowed them the option of either (a) not making any payments on unsecured debt for the length of their unemployment benefits while interest accumulates at a rate reduced to prime +1% or (b) allowed to make a payment equal to 2% of principal and be charged no additional interest until 60 days after they have found a job.
Steve – I like that, except forget the prime+1, just make it 1. Prime will not stay this low, and I think you and I both can make an easy case that we may very well see early-80′s rates coming back to play in the not-too-distant-future…provided other influences don’t come into play. When prime swings back up, that +1 will be killer for this group. I see the flat 1% as something the companies should be willing to take, considering the alternative was 0…as in 0 dollars (not 0%).
Smitty, this makes so much sense. It should be viewed as a win/win – once we remove credit card company greed. Honestly, why do these companies always seem to choose all or nothing over compromise?
I worked in two CC banks’ collections dept. One was stingy as hell, the other went out of its way to work with customers. Obviously, the latter was much more fulfilling to work for! I frequently talked with CCCS about reaging accounts, and I was authorized to settle accounts for less than 50 cents to a dollar.
CC banks have got to be VERY flexible these days.
Steve: The rules must have changed since I was in collections. (Granted, that was over 20 yrs. ago.) The only restriction I can recall was that certain states had a law (PA was one of them) that if a person requests no place of business calls, we had to comply. Also, no calls were permitted before 8am or after 9pm.
Hube
About 5 years ago (can’t remember exactly when) the rules changed to allow you to keep them from calling. But you have to actually say the words “emotional distress” for it to count.
Then their is also this option…..
<a href=”http://kavips.wordpress.com/2009/03/06/chapter-10-the-silver-bullet-a-3-month-mortgage-holiday/”http://kavips.wordpress.com/2009/03/06/chapter-10-the-silver-bullet-a-3-month-mortgage-holiday/
http://kavips.wordpress.com/2009/03/06/chapter-10-the-silver-bullet-a-3-month-mortgage-holiday/
One more time.
Holy crap, kavips! Back from your exile, I see? Now we know what you were doing.
For anyone that checks it out, kavips linked only his chapter 10 here. He did a massive presentation…go check it out.