When Joe Bonadio negotiated> a 69% reduction in $54,000 of credit card debt this year, his most valuable tool was a caller ID box with ring controller made by JF Technical Developing Co.
By blocking his telephone s ring on designated numbers, the device kept the financially strapped musician from Mt. Vernon, NY, in peace while representatives from the country s three biggest banks barraged him with 40 to 50 automated calls a day.
They know what s going to drive you nuts and that you are going to give them $60 just to shut the phone up, he said. I m not a religious person, but it is as if Satan said, I want to be on earth, and God asked him What are you going to be? And he said, I m going to be a bank.
Millions of Americans forced into the same situation since the financial crisis are similarly disillusioned.
These debtors stories underlie Wednesday s Federal Reserve report of a 1.8% annualized July decline in consumer credit, the 19th reduction in the 21 months since September 2008. It reflects the overly long process through which debts are cleared and the mistrust of lenders that makes people reluctant to borrow anew.
In turn, sluggish lending explains the interminably slow recovery in consumer spending. In part, the U.S. trade deficit s 14% drop in July, as reported Thursday, stems from consumers having no credit with which to buy imports.
Bonadio s experience highlights a psychological element to all this.
Helped by the Consumer Recovery Network, which teaches people to self-manage the wrenching debt settlement process, Bonadio got through the tough collections phase in the first three months after he first stopped making payments. Then, in the fourth and fifth months, he received letters offering settlement of around 50 cents on the dollar, which he negotiated down to an average 31 cents.
But countless others are worn down by the phone calls and the debt collectors warnings about bankruptcy, about the blow to their credit score. They pay the minimum due in the futile hope that a job or some other funding source will arise. Meanwhile, subject to a higher default rate, the unpaid balance keeps ballooning.
With each payment, the bank avoids charging off the account as a loss, which would be required if it became more than 180 days past-due. (That deadline explains why Bonadio got his unsolicited settlement offers in months four and five.) Yet in so many cases the accounts end up in settlement anyway or worse, in recovery.
In others, debtors fall for the traps set by one of the 2,000 or more heavily advertised debt-relief companies that have sprung up since the financial crisis.
Until a new law limiting the practice comes into effect next month, many such firms will charge hefty upfront fees worth 15% to 20%, based not on the savings delivered but on the total unpaid amount outstanding. The companies don t start negotiating with creditors until the debtor has accumulated sufficient funds in an escrow account.
Consumer Recovery Network is one only a few firms that don t follow this model. CRN s customers pay for a set of CDs and instruction manuals and not much more. Those who do want the firm to negotiate on their behalf pay 15% of the amount saved.
That seems like a much better approach for both banks and debtors than one in which available funds are siphoned off to third parties in up-front fees.
Indeed, Citigroup Inc. does not currently engage debt settlement companies, said a bank spokesman. He added that Citi will continually work with financially distressed customers to help identify solutions for their needs and that as of June 30 it had helped more than 1.6 million credit card members manage their card debt through a variety of forbearance programs.
Similarly, a J.P. Morgan Chase & Co spokeswoman said her bank will will not work with debt settlement companies and that customers doing so will be advised of this policy and encouraged to work with Chase directly or to contact a non-profit 501(c) 3-licensed credit counseling agency.
Bank of America Corp. did not respond to a request for comment.
CRN President Michael Bovee said banks have become more proactive in seeking settlement after suffering bankruptcy recovery rates as low as six cents on the dollar. But the process is still highly stressful for debtors so harming the economy.
How are we going to recover when people are swimming in debt? Bovee said. They are not purchasing goods. They are not living for today, or for tomorrow; they are paying for yesterday.