Banks are getting hammered for all of their missteps and risk taking that contributed to the housing bubble and subsequent burst. Unfair foreclosure practices; poor quality underwriting standards; packaging and securitizing subprime mortgages to investors; have been daily headlines for several years. Banks played a dominant role in what went wrong and indeed deserve to have captured the negative attention heaped upon them. Their patch work fixes and commitments when it comes to the housing part of the credit bubble have so far proven ineffective. Some would say their efforts are insincere.
While banks appear to be struggling to find the willingness to be active participants in repairing the issues related to securitizing and lending in the housing sector, they have exhibited a far different approach and willingness to handling another sector of the credit bubble; Massive credit card issuance.
During the credit boom, banks appeared willing to issue credit cards to anyone carrying a wallet or purse that could fog a mirror. The pre-approved offers were often made with available credit limits far in excess of an individual's ability to repay were the offer truly based on sound underwriting principles, as opposed to a computer algorithm driven credit score (FICO).
Stories abound that touch on how difficult it is to modify a mortgage, get payment reductions consistent with the ability to pay and stay in the home, get approval on a short sale etc. How banks are dealing with those unable to pay credit cards is nearly the opposite. Banks in fact reach out in an extremely proactive way with a number of options available to the delinquent credit card borrower.
The willingness of banks to work directly with their credit card members who fall behind often begins immediately after a payment is missed. Actually, the lender is acting in its own best interest with its established loss mitigations strategies, but those efforts are often fair and measured to their card holder's ability to pay.
The first step is to talk to your creditors about the situation. Yes, the same creditors who may have jacked up your interest rate in the past, or who may have already lowered your available credit limit to the balance you are carrying.
If you have ever tried to talk with a creditor about lowering your payment when you are current with them, you are already familiar with the word no. The hardship you explain you are in seems to fall on deaf ears. That is primarily because the person you are speaking with is generally not empowered to make any changes to your payments, even if they wanted to, while you are current.
The same creditors that were reluctant to work out manageable payment arrangements with you while you were still current often have a different willingness to work with you once you fall behind.
When you miss a payment banks will start to reach out to you through phone and email almost immediately. Creditors know that frequent reminders that you are late increase the likelihood that they can get you to make a payment and potentially get the account back on track. Many creditors will offer lower payment arrangements within weeks of missing a payment while others won't make those offers until you are a month or more behind.
The payment reduction plans offered are mostly due to their willingness to reduce your interest rate.
As mentioned previously, interest rate reduction plans have been traditionally available to over indebted consumers through credit counseling associations and their DMP product. Many banks now make direct offers to you with the same lower payment benefit, cutting out the middleman credit counseling agency. In fact, the payments concessions offered by some credit card issuers may exceed the benefits available through that of nonprofit counseling group. There are bank sponsored payment plans that you may qualify for where you will pay zero interest.
Depending on the bank, your financial ability to commit to a payment, how far behind in payments you are, a hardship plan may look something like this:
When you're already behind in payments and you either call the creditor yourself, or pick up one of the many calls that will be placed to you in an effort to establish a payment plan, you'll be asked qualifying questions. The questions center on your monthly income and what you pay out each month for bills. You may be asked what you pay for rent or on your mortgage, what you pay for cell phone, utilities, internet etc. How you respond will impact what plan you qualify for, or whether you are offered a reduced payment plan at all. If your monthly cash flow shows no money available after essentials are met, you obviously cannot reasonably commit to any plan, no matter how good the terms. If the income and expense exercise shows too much excess and available money, the payment plan offered may not be as favorable.
Creditors offering a 5 year hardship repayment plan may require you to recommit to the plan every 12 months.
Additional benefit to a hardship plan may include:
The 2 main drawbacks are given below:
Credit counseling gives relief from debt burden in the following ways:
By far, the main drawback to starting a DMP or hardship repayment strategy is the inflexibility. If you miss a payment on these plans it results in losing the lower payment benefits. The lower interest rate disappears and may even increase beyond what it was prior to starting the plan. The worst part of falling out of a payment plan is the lost time and financial resource that get wasted in a plan that did not relieve the debt.