Have you ever wondered why a credit card company would be willing to settle with you and let you eliminate a portion, if not all of your debt. The answer lies with logic and leverage.
Bankruptcies are at an all time high
5 years ago when money was growing on trees bankruptcy rates were very low so if you tried to settle with your credit card company they would tell you to “take a hike” or “go refinance your house and pay us”. That worked then but now money is not growing on trees and equity has evaporated from homes. For those that do have equity lending standards have gotten so tight that even refinancing to take money out of your home can be difficult. The projections for this year are that bankruptcies will be at an all time high. Oh how the times have changed. What does that mean? That means the banks would rather get something from you in a settlement than nothing if you file for bankruptcy.
Foreclosures are at an all time high
Much of the country is entangled in some way or another in the largest foreclosure mess we’ve ever had. Based on the fact that so many families are have a tough time paying their mortgage the credit card companies are sometimes willing to help because they know that if you are experiencing foreclosure that they may be next to not get paid.
They break the law
There are federal and state laws regarding how it is that creditors are allowed to collect on their debt. The credit card companies are so profitable that they have the ability to be sloppy with their business practices and often times they will simply break the law in order to try to get you to pay. Because no one really knows what the laws are the credit card companies have no incentive to obey them. This is called predatory lending. If you happen to know the law and can prove the credit card company broke them then you now have leverage against the credit card company. There is a monetary valuation each time the collector breaks the law. So, It is possible that you could owe a collector $1000 and because of all the times they broke the law they could owe you more than you owe them. At this point it is in their best interest to settle for less, if not all of what you owe to avoid going to court.
The further away you get from paying your bill the more likely the credit card company are willing to settle for less than what is owed. Imagine someone owed you $1000 and you had a payment arrangement with them to pay you back $20 a month. If they stopped making that payment you would probably get upset and try to collect the monthly payment. However if you didn’t receive any payments for a year you may just give up trying to collect. If that same person that owed you the money came back to you at the end of the year and offered you $300 to settle the $1000 you may do it because you never thought you were going to see a dime of your money back and you think to yourself “something is better than nothing”.
Because the Federal Reserve is attempting to force interest rates to remain at historic lows it allows credit card companies to borrow at the lowest rates in their history. At the same time credit card companies are charging the highest interest rates to the consumer. Therefore the spread between what they borrow at and what they charge us is huge. This adds a financial buffer to the credit card companies. Basically, they can afford to not get all of what is owed on some of their accounts as long as the rest of us are paying on ours.