Both consumers and banks are continuing to feel the economic pinch, as credit card chargeoffs rose to over 10% for the first time ever. According to Moody’s, their chargeoff rate index rose to 10.62% in May versus 9.97% in April. In addition, TransUnion reports that 1.32% of credit card users were at least 90 days delinquent in the first quarter of the year, representing an 11% increase from a year ago. The Federal Reserve confirms this trend, reporting that 6.5% of credit card debt was at least 30 days delinquent in the first quarter, the highest number ever reported. Overall, analysts estimate that credit card losses could surpass $70 billion for the year.

While they are reluctant to admit it, this sobering backdrop has caused banks to switch up their strategies. Card companies are now increasingly willing to negotiate with consumers who have outstanding delinquent balances, in an attempt to salvage at least a part of what they are owed.

Let’s make a deal
Many issuers have now empowered front-line call center representatives with the ability to cut deals with cash-strapped borrowers. Sometimes, the bank is even the one who will initiate the call.

Not for everyone
Settlement deals, however, are not available for everyone. Borrowers who appear to have the least ability to pay are the likeliest to receive an offer. And there are significant downsides:

• Settlement deals will still seriously harm a consumer’s credit record and
• you’ll also need to pay taxes on the amount of debt that is forgiven.

Overall, though, negotiated settlements are almost certainly a net positive for borrowers, assuming that they can come up with the money. The taxes owed will be substantially less than the amount forgiven and the settlement also prevents the bank from suing over the debt.