Credit card companies are increasingly forgiving borrower’s debts or are working with consumers to pay their debts in anticipation of record credit card defaults in 2009, reports The New York Times (“Credit Card Companies Willing to Deal Over Debt,” Jan. 3, 2009).

Over the last year as unemployment has risen and credit has tightened, consumers have had fewer options to draw on to pay off their debts. Gone are the days consumers could tap into their home’s equity or their retirement savings or take out a consolidation loan, and credit card companies are looking to get paid before things get worse.

“Knowing that the sources of funding have dried up, having someone pay the balance in full isn’t a viable strategy,” said Tim Smith, an executive at Firstsource, one of the country’s largest debt collection agencies.

Collectors Hope to Minimize Looming Defaults

Credit card lenders are expecting to write off some $395 billion in defaulted loans over the next five years, according to projections from The Nilson Report, an industry publication. By comparison, lenders have written off approximately $275 billion in bad loans over the last five years.

Now, companies that formerly could expect payment in full are accepting pennies to dimes on the dollar to settle debts.

“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing officer at MRS Associates, a collections company that works with some of the largest credit card companies. “The big settlements just aren’t there anymore.”

To help customers repay their outstanding credit card debts, banks are waiving late fees, lowering interest charges, and reducing loan balances — last year alone, Bank of America reduced the loan balances of as many as 700,000 of its customers.

American Express and Chase Card Services are taking similar actions as more customers fall behind on their bills, The Times reports, and lenders are giving debt collectors more leeway when dealing with debtors who are in financial distress.

Consumers Have Extended Repayment, Settlement Options

Debt collectors are increasingly giving delinquent borrowers extended repayment plans that allows debtors to repay their debt in 12 months instead of the usual six, so that lenders can avoid writing off a debt completely.

Before the economic downturn, Paul Hunziker, chairman of Capital Management Services, said that his firm put only about 25 percent of all borrowers into these long-term repayment plans; now, that number has grown to about 50 percent.

In the most serious credit card delinquency cases, banks are offering to forgive 20 to 70 percent of a consumer’s credit card debt, but such deals could result in a 70- to 130-point drop in a borrower’s credit score that could last for up to seven years.

Troubled borrowers also have the option of negotiating directly with their credit card company to settle their debt, or hiring a debt settlement company to negotiate on their behalf.

Robert Manning, author of “Credit Card Nation” and a longtime critic of the credit card industry, said, “Consumers have never been in a better position to negotiate a partial payment.”

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