Banks and Creditors to Take Off 40% of Consumers' Debt

Though credit card balances are constantly dropping for the last 12 months, banks and credit unions expressed willingness to take off up to 40 percent debt of financially-stressed borrowers.

The latest data released by Federal Reserve showed consumers debt decreased to $86.2 billion. On August and September this year, 90 million cardholders' liabilities were recorded at $898.9 billion and $889 billion, respectively.

On the other hand, non-revolving debts, which are loans for cars, students, homes, also dropped to $1.567 trillion in September this year. In 2008 of the same period, the consumers' liabilities were $2.456 trillion.

Analysts explained that job losses have caused consumers to slow down in using their credit cards and stop borrowing more than they can pay. The unemployment rate was recorded at 10.2 last October, resulting to about 15.7 million people in America having no work.

However, this change in borrowing lifestyle does not solve the banks and lending companies' woes of losses. This continued economic slump provides a vague scenario to credit companies that the multi-billion dollar debt incurred by consumers may never be repaid.

According to a study conducted by the University of Illinois, most Americans carry an average of $46,000 debts in mortgages, credit cards, and car loans. Only two percent of their earnings go to savings. With this discrepancy, it is perceived that many Americans will go bankrupt.

So far, banks and lending companies have taken steps to protect their earnings - reducing credit limits, closing inactive accounts, and increasing overall interest rates.

Banks' proposal to forego 40 percent of the card debt is the latest measure to recover some of the money from consumers who owe them. The remaining balance is payable for five years without interest.

This scheme would lighten the burden of cardholders. On the part of banks, this proposal will give them a possibility of recovering a portion of the borrowed money.

Initially, only 50,000 consumers, who are financially unstable and near bankruptcy, would benefit with this proposal. Lending companies will eventually extend the same to tens of thousands.

Meanwhile, banks have requested the Office of the Comptroller of the Currency (OCC) that they will be allowed not to furnish the federal agency the record losses they will incur this year because of forgiven debt.

There is a rule that banks should book their earnings and losses. The same is subject for review and evaluation by OCC, which regulates and supervises 1,650 commercial banks in the country.

An advocate group, Roundtable and the Consumer Federation of America, opined that this new proposal is a win-win solution to both parties.

Bryant Park

Bryant Park is a financial consultant for one of the companies listed on Wall Street. He writes on a variety of topics ranging from credit cards to different loans that can be availed by consumers. He holds a bachelor degree in Financial Services from Dartmouth College.