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Consumer, lender groups ask for card debt forgiveness

Unusual alliance seeks greater latitude to cut credit card principal

By CreditCards.com

An unusual coalition of lenders and consumer advocates have asked federal banking authorities for permission to forgive a portion of some credit cardholders' debts.

In a jointly signed letter, the Financial Services Roundtable and the Consumer Federation of America have asked the Office of the Comptroller of the Currency to allow the partial forgiveness of credit card debts.

"American consumers are carrying record levels of debt," stated the letter. "Given the current financial situation, national banks and credit counseling agencies are reporting that an increasing number of consumers do not qualify for existing debt relief programs."

Current industry practice lets card-issuing banks negotiate down interest rates, penalty fees and monthly payments -- but not significant amounts of principal.

The current guidance from the OCC says that if principal reductions are made, then the balance must be paid within three to six months, and lenders must report the forgiven debt amount to the IRS , which the borrower must pay taxes on.

"For consumers with significant credit card debts, many simply do not have the funds to make lump-sum payments and pay a tax liability within a few months of reaching a settlement agreement," the letter stated, noting that banks take a hit under such cases, too, since they have to quickly write down the loss.

They proposed an alternative: A test program under which borrowers would have more time to repay settlements and lenders more time to write off the loss.

"Working with credit counseling agencies, a group of lenders, including virtually all of the largest national credit card banks, have agreed to a limited duration test to determine whether this class of consumers could benefit from new, more generous concessions and whether such concessions increase collections," said the letter, which was signed by the Consumer Federation's Legislative Director Travis Plunkett and the Roundtable's Senior Vice President Scott Talbott. "This test will involve reduced balance repayment plans, whereby lenders actually forgive a portion of the amount owed, and the borrower repays the remainder over time. We believe that permitting and approving such a test would be in the best interest of consumers, lenders and the American economy -- especially in the current climate."

The two groups asked the OCC to consider the urgency of the need for the program and to reply as soon as possible.

A spokesman for the federal agency, which charters, regulates, and supervises more than 1,600 national banks, said it had received the letter and is reviewing it.

See related: Beware the tax bite that follows debt resolution, Creditors become less willing to negotiate with debtors, Treasury wants to jump start stalled credit card securities

 

Published: October 31, 2008


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Updated: 09-27-2016


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