Bankruptcy

Credit Card Negotiations In The Life Of Your Credit Card Account: Why Don't They Negotiate Balances?

By Jonathan Alper

Before filing bankruptcy many people try to negotiate settlements with their credit card companies and find that their creditors are not willing to reduce loan balances. Some debtors hire debt negotiation or debt consolidation companies and find that these companies cannot significantly reduce balances. Other debtors avoid bankruptcy by negotiating very favorable settlements with credit card collectors. So, why do some creditors negotiate debtor?s account balances while other creditors refuse any meaningful settlement? What are the creditors thinking?

One of my personal friends is a successful investor who currently is purchasing blocks of credit card debts. He and his partners recently purchased $10,000,000 face amount of defaulted credit card accounts. He purchased the accounts at a deep discount. My friend knows the credit card business well; he described the life of a typical credit card account in default.

My friend explained that past-due credit card accounts initially remain with the original bank for collection. A bank will turn delinquent accounts over to a collection company that will use phone calls to try to collect this money. The phone collectors work on a contingency compensation program.

Bank collectors typically will not discount credit card debt. The banks believe that reducing credit card balances because of individual hardships will only lead to greater defaults once the "word gets out" that one bank or another is giving their customers a break. Banks have determined as a group that they are better off taking a hard line and getting a few people to pay their entire balance than by making settlement reductions and getting lesser amounts from a greater number of customers. Debt negotiation companies do not have significantly better results because banks will not negotiate with anyone, according to my friend the investor.

My friend states that banks cannot keep non-performing credit card accounts on their books for longer than 180 days because of banking regulations and accounting rules. After 180 days the bank will turn their delinquent accounts to a broker in order to sell the bad accounts to investors such as my friend and his partner.

The debt brokers sell better quality defaulted bank debt for 5% to 7% of face value. The investors in aged credit card defaults then hire their own debt collection companies to collect what they can on a contingency basis. Attorneys may buy debt, and some collection attorneys participate in credit card account investment groups. The attorney groups are more aggressive and more likely to file a lawsuit soon after purchasing accounts.

The credit card investors are much more likely to settle debt balances because they pay little for the delinquent accounts. My friend says that his investors are very happy to recover anything more than 20% of the face amount of delinquent credit card debts. Debtors and debto negotiation companies can reach favorable settlements with credit card account investors.

Therefore, debtors should not expect to successfully negotiate credit card balances outside of bankruptcy until the account has been delinquent at least 180 days. If you get notice that the account has been assigned to another owner after 180 days the bank has probably sold the account to an investor. At that point, you have a good chance to settle your debts for a small percentage of the amount due especially if you can offer a cash settlement.

Full post as published by Florida Bankruptcy Law on May 27, 2010 (boomark / email).