Banks now ready to forgive credit card debt

I was surprised to read this:

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 new pilot 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 to be forgiven would rise according to the severity of the borrower’s financial situation, up to a maximum of 40 percent. […]

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 have reached a point where they can lose less by forgiving part of the debt than seeing the consumer walk away entirely. [emphasis added]

This is the very first move I’ve read about that I think might actually mitigate the current crisis. Every move up until now has failed to recognize that it is not the terms of the debt that are causing the difficulty, but the size of the debt.

The clearest example is with houses. If I took a $500,000 loan to buy a house which is now worth $250,000, no matter how the debt is refinanced I can’t avoid selling at a loss (i.e. would not be building equity) until I have paid the loan down to $250,000, which could take twenty years. If half the loan amount were forgiven, though, then the balance would match the value of the house and I’d be able to sell the house without taking a loss, or keep it and be building equity as I paid down the loan.

I wish that someone smarter and wiser than me would begin to sort through the moral issues involved in this situation, because I think we should not sacrifice fairness to our belief in an economic system, and it is obvious to me that the outcome has been very unfair to those holding consumer debt, whether on a house that is now worth half the loan amount, or on a college education or vocational training that was grossly overpriced for the benefits it will yield, or even for expensive toys that now can hardly be given away.

If people are so inherently gullible, foolish, greedy, and self-indulgent that they are doomed to ruin their lives when given such opportunities, then it is probably not a good idea to structure a society so that some can benefit greatly by playing on those weaknesses while being legally insulated from the damage they inflict. As to how we go about unwinding this mess so that the damage done is distributed fairly among those who cause it … I’m still waiting on that smarter and wiser person to explain it to me. But forgiving excessive amounts of consumer debt might be a start.

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7 thoughts on “Banks now ready to forgive credit card debt

  1. I think credit card companies could do a lot better by treating people decently in the first place, for instance not charging 20+% interest and tacking on those exorbitant cash advance and late payment fees. But yes, we’re seeing some pretty desperate measures right now, and nothing surprises me anymore.

    I know some people who invested very, very foolishly, but it is very discouraging to see them unable to get on their feet because they’re stuck paying a mortgage on something that they not only can’t afford, but can’t even get out of by selling it. Even once you see your mistake, there’s really no way to save face or make good.

    It’s really hard to tell what a wise course of action would be. I feel very, very lucky not to be “between a rock and a hard place.” Of course, a good bit of that is because we were very, very conservative with our debt, but I can see how someone could get confused when they’re completely surrounded by foolishness.

  2. My 2 real copper pennies worth…
    I just don’t see where having and enjoying the benefit of a new huge house, or a college degree, or expensive toys like a new car, boat, big screen TV, or RV is “unfair” to those who of their own free choice decided on a price and took out a loan at interest to enjoy these things before they worked and paid for.

    I grew up with my mom telling me that I “had to eat my carrots, beets and broccoli first before I got to enjoy some blackberry pie. If she ever let me eat the blackberry pie first she didn’t say now you don’t have to eat your vegetables…

    I am not sure I see where those supplying the money and loans are “insulated” from the damage any more than the consumer. If the consumer walks away from paying…then the lender is at a loss and the consumer is insulated. Granted the lender in the current banking system who loans the money has created that money out of thin air and doesn’t really lose…they only really lose their income when someone is not paying interest.

    To me, in the current system the one who causes the damage is the one who wants to enjoy the benefits of something before they pay for it and are willing to take out a loan for interest which creates an artificial demand for a product and hence causes the price to go up. Then when many decide they can’t pay then the demand is lowered and the price goes down.

    Probably the real solution could be threefold 1.) Is to implement the principles given in S.C. Mooney’s book “Usury, Destroyer of Nations” and it’s underlying references. 2.) Do away with possibilities of declaring bankruptcy and borrower being able to walk away from being a slave to the lender. 3.) Require the seller (not the lender), since they have received the full money from the transaction, to have a stake in the decrease or increase of the value of the asset under the loan, until the loan is paid off or the asset is sold in future years. That way the seller would share in the profits or loss at time of future sale or default during the term of the loan. That way the lender would not have to bear the loss in default where no interest was charged and only bear the loss of future interest where interest was being charged.

    If there was no profit for loaning out money and there wasn’t the possibility for “reaping before or without sowing” then all these issues would disappear.

  3. Speaking from the viewpoint of someone who declared bankruptcy because of credit card debt (which was due about 1/3 paying for a catastrophe with a credit card, and about 2/3 to stupidity on my part), I think part of the problem is that it is really hard to negotiate with a credit card company. From my experience, I, like most serious debtors, wanted to pay what they said I owed, even though after a certain point, that number was mainly determined by high interest and fees that I had agreed to when opening the account. Some of my creditors simply refused to negotiate. Those that were willing were willing to agree at most to reduced payments for a maximum of six months. But my financial predicament was not going away during that period. And the level of harrassment from creditors who would not accept partial payment (by which I mean not the fact that I was being called, but the level of invective cast at me during the calls including obscenities and plain-out threats) meant that it was a great deal easier to declare bankruptcy, not so much because I wasn’t willing to continue paying what I could, or because I could get away from my feelings of guilt, but because I couldn’t handle the way I was being treated. I suppose you can say that I deserved whatever I got–but I am not sure that I deserved to be called obscene names, or to be threatened with the collectors calling my employer and my relatives to complain about about me. I hear that what happens in a lot of these cases is that people can continue to make the payment they were paying, but they can’t manage the adjusted payment, and the banks will not accept a partial payment on the mortgage.

    If the lender won’t accept partial payment, and forecloses because of that, is that really all the borrower’s fault? Blessed are the merciful, for they shall obtain mercy.

  4. Something I’ve been thinking about, too…

    Milton says, “If the consumer walks away from paying…then the lender is at a loss and the consumer is insulated.”

    But the lender ends up with the house, plus all the money the borrower has paid over the years. Thinking about our own case, in the three years we’ve had this house we’ve paid nearly 1/4 of the sale price, but naturally the majority of that has been interest payments, even though we’ve always paid extra on the principle each month. And if we were to try to sell now we’d probably lose money on it.

  5. SB,

    Thanks so much for telling your story here. It’s not as easy to respond with a glib, formulaic, hard-hearted answer when confronted with specific details of how this crisis is playing out in one person’s life.

    All,

    Do any of you know of Christian teachers who are providing solid, biblical, and practical instruction on how Christians should respond to this crisis in its various manifestations? Or, if not, do you think that it is even a topic that our teachers should be addressing?

  6. Kelly
    It gets even worse if you decide to “walk away” from paying your property taxes. Even if you own lets say a 1 million dollar house free and clear and decide you will walk away from your owed taxes. The government will take your house away from you, giving you nothing in return, and give that 1 million dollar equity to someone who wants to pay the taxes just for the cost of the back taxes.

    Rick
    One person I would trust to give good instruction would be S.C. Mooney, I just wish he would write more. But maybe he would if requested. I do think true Biblical economics should the the number one thing our teachers and churches should be covering. There are so many incredible solutions in it for the world’s problems right now.

    Their aren’t any easy answers for a “Christian” who has allowed themselves to become “Slaves.” There isn’t really anything about being a slave that is not “hard.” As Prov. 22:7 RSV says “The rich rules over the poor, and the borrower is the slave of the lender.” You can either bear the hardship and have a good chance of being taken as in the story of Jacob and Laban, or you can run away from your “Master” and complain about only having the clothes on your back, or Christian friends could band together and redeem you from your slavery.

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