Banks asking for credit card debt forgiveness

[sweeps]

With defaults on credit card debt spiraling amid a global financial downturn, banks already reeling from the mortgage crisis are losing billions more from unpaid credit card bills.

Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

Banks asking for credit card debt forgiveness - Economy in Turmoil

[kork13]

I'm having a bit of trouble understanding fully why BANKS are pitching this, not being pitched to... So to be clear:
a) banks want to be more willing to settle people's CC debts. This decreases the risk of debtors filing bankruptcy, in which CC's normally get next to nothing. This makes reasonable sense.
b) a proviso is that in order to be eligible for the program, a person must be enrolled in a credit counseling program. doesn't this hurt their expectation for future profits?
c) banks will write off HUGE sums of money in this deal. wouldn't this kill their profits and in turn, their stock values (and what good CEO isn't looking out for the shareholders?)

Also, why do the federal regulators have to get involved here? If they want to offer a program like this, can't they just do it on their own?

[simpletron]

a) banks want to be more willing to settle people's CC debts. This decreases the risk of debtors filing bankruptcy, in which CC's normally get next to nothing. This makes reasonable sense.

there is a reason why it is 40% of the debt. first bank will get a tax deduction for the amount forgiven and if the comsumer pays back the money plus the 20+% interest rate then there is a very good chance that the banks would as least break even. second, a lot of people have mortgages and car loans with the same bank as their credit card, so if they don't declare or postpone bankruptcy then the bank gets the interest all the loans longer. I wouldn't under-estimate how much money banks would save or make by doing this.

b) a proviso is that in order to be eligible for the program, a person must be enrolled in a credit counseling program. doesn't this hurt their expectation for future profits?

this was my question, too. getting a bunch people that carry a balance to wise up, doesn't seem to be in their best interest long term. maybe the bank is thinking once they stop going to credit counseling that they will fall back into credit card debt. other than that I can't think of anything.

c) banks will write off HUGE sums of money in this deal. wouldn't this kill their profits and in turn, their stock values (and what good CEO isn't looking out for the shareholders?)

Borrowers would be able to defer payment of income taxes they owe on the forgiven part of the debt until after the remainder was paid off. The lenders could wait until then to book their loss on the forgiven debt.

so no immediate loss. either the comsumer pays off the debt before the write off (bank wins and the write-off neglates some early profits) or goes bankrupt(bank doesn't lose more). so it is a no lose sitution for the bank.