Big banks have joined with consumer advocates to help those who have been crushed under the weight of credit card debt.
The Financial Services Roundtable in Washington D.C. has proposed a test program to cut people's credit card debt by a maximum of 40 percent. Fifty-thousand people could qualify for the program which would focus on those already in credit card counseling and on the verge of having to declare bankruptcy.
"These are families and people who want to pay off their debt but they are not eligible because the interest rates are too high," said Susan Keating, President and Chief Executive of the National Foundation for Credit Counseling.
The program must be approved by federal regulators which require repayment programs to be completed within five years. The amount forgiven will be determined on a case-by-case basis and depend on the level of indebtedness.
Bankruptcy attorney Thomas Gorrill said there were few downsides to the plan. "The only thing I can see is that people would still have a tax liability on the amount of debt that is for forgiven," said Gorrill. Under tax law, debt forgiven is considered taxable income. But Gorrill said it was a step in the right direction.
Credit card issuers usually respond to delinquent payments with higher interest rates and late fees, resulting in more indebtedness. In 2005, bankruptcy law changed to make forgiveness of credit card debt in bankruptcy more difficult, including more paperwork, meeting with credit counselors and taking financial management classes. That's why the move comes as a surprise to some.
With some of the country's largest financial institutions failing, some believe card companies are moving to prevent losses. "It's a perfect financial storm. With the increase in bankruptcies, this makes good financial sense," said Keating. Companies would still be able to receive some payments instead of taking a total loss. So far this year, 11,002 bankruptcies have been filed. That's compared to 7,670 filings last year.
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Gorrill said banks and credit card issuers may also be looking to get ahead of political winds. "The political climate is changing. They may be expecting that the next administration could bring more protections for the consumer," he said.
