January 02, 2009
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News: ‘Forgivness Deal' Not A Giveaway, But Nice.
The short of the situation is the certainty of bad things to come if extreme measures aren't taken. The credit card industry has been turned down by the government for assistance, but are going ahead with their plan anyway. The plan is to forgive debt and extend payment terms. Although the government issued a flat ‘No' when the credit card requested help with this movement, most of the government rub was concerning the handling of taxes. Say, if 40% of a $1,000 credit card default were forgiven, the $400 would not be taxable to the forgiven borrower until the other $600 was paid off over next five years. On the other end, the lender would be able to deduct their loss as soon as the deal was in place and payments began.
GAAS accounting rules call for the taxes to be paid as soon as the deal is cut and the lender cannot write off the credit card debt until either a 90-day default period or else until the remainder is paid in full (after five years). It seems that the 2004 bankruptcy legislation which the credit card industry so heavily endorsed has backfired on them. Since that time, the debt they have had to discharge has tripled while the secured debt financiers have been given precedence over the unsecured credit card industry.
For the borrower, this ‘forgiveness deal' is not without it's strings. Their credit rating is likely to take a 70 to 130 point FICO whack. They will find it difficult and expensive to get credit in the future. Still, most of these troubled borrowers are already in straights and will welcome this chance to avoid bankruptcy. So far, these options are only available through the credit card lenders directly (or their collectors). Councilors and independent agencies can't arrange these offers. Rules are still fuzzy as new methods are being tested but, be careful of the shysters who emerge with marketing ploys to promise things they can't deliver. Steer clear when you hear the words "up-front fees'.