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Crackdown exposes details of credit card debt settlement offers

Fred Williams

Who gets to settle their credit card balance for 75 percent off?

Last week’s regulatory crackdown on GE Capital, now called Synchrony, sheds some light on the previously murky topic of which strapped customers get offered big debt settlements, and how much.

Card issuers don’t like to talk about the issue (why negotiate in public?) but the store-card issuer’s consent order from the Consumer Financial Protection Bureau revealed the terms that Synchrony offered some strapped cardholders. The “some” was the problem that led to the crackdown: The company failed to extend the offers to its Spanish-speaking customers.

For English speakers, the company offered to erase 45 percent to 75 percent off people’s balances, with some conditions. They had to have a balance greater than $200, be behind by four or more payments and not have made a payment within the previous 90 days.

And one more thing — they had to meet “internally developed risk score thresholds.”

Debt settlements are a tricky business for lenders. On one hand, getting 25 cents to 55 cents back for every dollar loaned is better than selling off the debt on the debt market, where the average price is about 4 cents on the dollar. On the other hand, you can’t just throw open the doors to these offers.

“They’re not going to last very long if they only collect 50 cents on every dollar they lend,” says Kevin Maher, a credit counselor and community outreach coordinator with DebtHelper.com, a nonprofit credit counseling agency in Florida.

Who gets the settlement offer, and who gets to be on a first-name basis with an unsympathetic collection agent for the foreseeable future?

Synchrony is still mulling an interview request to unpack that question. But Maher has worked with card issuers for years on debt settlements, so he has an idea what’s involved. It goes back to those internal risk measures, he says.

For hardship consideration, having suffered a job loss or an unexpected expense, such as medical debt, is usually just the starting point. The bank also looks at the difficulty it will face getting paid. “It has a lot to do with: Are they easily garnished?” Maher said.

If you are self-employed or file your taxes as head-of-household, it will be tougher for the bank to garnish your wages — assuming it goes to the trouble of getting a court judgment. The same is true if most of your income is from Social Security, or other federal benefits that are protected from garnishment. State law also plays a role in how difficult it will be for the bank to seize your pay.

GE stopped offering the particular settlements involved in the CFPB order in 2012. But Maher said that offers along similar lines are usually available from most of the big card issuers on a continuing basis, through their hardship programs.

Another offer revealed in last week’s CFPB order illustrates the choice that lenders face: Kick delinquent customers loose, or encourage them to catch up. Instead of settlements, some delinquent cardholders were offered a statement credit of $25 to $100 in return for making up three overdue payments, under certain conditions. These customers had to have three payments due, a balance north of $700, and a credit bureau score below 670.

If you scrape the funds together, you get to keep making minimum payments, and the card is still available for more borrowing.

Of course, that could be a losing financial strategy in the longer run.  For people in hardship, settlement offers and catch-up incentives need to be looked at in the context of your overall picture, Maher said.  Snapping up a break might actually be a bad idea — even if you do not owe taxes on the discount because you are insolvent. Devoting your scarce resources to one settlement offer can backfire if it leaves you with nothing for bills and other debts.  “If you have several creditors,” he said, “each one is going to treat you differently.”

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