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With defaults on credit card debt spiraling amid a global financial downturn, banks already reeling from the mortgage crisis are losing billions more from unpaid credit card bills.

Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years, when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

The proposal was pitched by the Financial Services Roundtable, which represents more than 100 big banks and other financial companies, and the Consumer Federation of America to U.S. Comptroller of the Currency John Dugan. Under the groups' proposal, a pilot project would allow big credit card companies to sharply reduce the amounts owed by consumers in over their heads who don't qualify for the repayment plans now available.

The program - which the banks hope will become permanent - could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt that could be forgiven would rise according to the severity of the borrower's financial situation, up to a maximum of 40 percent of the amount consumers owe, allowing them to pay back the remainder over time.

"There's obviously a financial benefit to the financial institutions to step up to the plate right now," said Susan Keating, president and chief executive of the National Foundation for Credit Counseling, which has 108 member organizations around the country. "We absolutely support the proposal."

The pilot program could reach as many as 50,000 borrowers, said Scott Talbott, senior vice president at the Financial Services Roundtable. Borrowers would have to be in a counseling program for their credit card debt. The amount of debt to be forgiven would be determined case by case, depending on the borrower's financial condition; those receiving close to the maximum forgiveness level would be nearing a personal bankruptcy filing.

And there would be a tax benefit. Borrowers would be able to defer payment of income taxes they owe on the forgiven part of the debt until after the remainder was paid off. The lenders could wait until then to book their loss on the forgiven debt.

In an increasingly tough economic climate, banks and other mortgage lenders already have been agreeing to modify loans of distressed homeowners to help them avoid foreclosure. Now, banks making credit card loans can lose less by forgiving part of the debt than seeing the consumer walk away entirely.

Credit cards now appear to be the latest domino to topple in a financial crisis that started with subprime mortgages and continually takes new twists.

Amid rising job losses, credit card consumers have been defaulting at high levels. Banks already battered by the mortgage and credit crises are losing tens of billions from the defaults. The largest credit card banks each set aside between $1 billion and $3.5 billion in the third quarter for losses on card loans.

Credit card charge-off rates - balances written off as unpaid - hit 6.8 percent in August, up 48 percent from 2007, according to Moody's Investors Service.

The biggest credit card lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.

Americans are carrying about $900 billion in credit card debt, according to the latest available Federal Reserve figures.

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The program - which the banks hope will become permanent - could involve as many as 50,000 people struggling with credit card debt.

Koolaid wrote..

That doesn't seem like it would make much difference.

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A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.

Last modified: 2008-10-31 20:07:11 by moonoverseattle
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