Try to Cut Honest Deal With Creditors <i> Before</i> Payments Are Overdue

Some months ago, a Southern Californian who’d been out of work for seven months sent us copies of correspondence between him and American Express over his delinquent accounts. Believing that creditors should “work with a customer during difficult times,” and hearing that they do, he had asked to work something out.

Referring often to his good history with AmEx, and the good histories of his parents and his in-laws, he first suggested having his Green and Gold card balances (near $3,000 each) transferred to his Optima revolving account. Once employed again, he offered $100 a month, promising the balance when he refinanced his house. In response, American Express alternately offered “to arrange a mutually agreeable payment schedule” and sent instructions for cutting up his cards.

Apparently there were also phone calls, inconclusive, and the man sent one $100 check. That was it. The accounts were turned over to a collection agency, and to this date, AmEx has received nothing more on a total debt of about $7,400 on his three accounts.

So much for the upbeat idea of creditors working things out with delinquent customers. A lot of negotiations must end this way. Friendly negotiations over delinquent loans just aren’t normal.

These aren’t normal times, of course. Many people are in trouble. Delinquencies on all bank loans (car, personal, home equity, etc.) have increased. So have personal bankruptcies, given both hard times and the relative ease of filing.

Goodness alone doesn’t make creditors flexible. They don’t want more consumer bankruptcies, already said to be costing them $12 billion a year. Foreclosing on mortgages is a costly procedure, and they don’t really want the houses, cars and personal assets they take over.

Nor do they like writing off bad credit card debts--a more common default, because people protect house and car to the bitter end. But it’s harder to weep for an institution’s credit card losses: Lenders take a lot of gambles on credit cards, by design making big money specifically on people who can’t pay the bills. They made up the game: They win some, they lose some.

Obviously, they prefer “work-outs” to “write-offs,” and so should consumers. “Bankruptcy is seen as the easy way out,” says Virginia Stafford, spokesman for the American Bankers Assn. in Washington. “The bankruptcy mills say, ‘Come to us, and start fresh.’ People don’t know it means they may not get credit again.”

Better they should go to their creditors early, before their loans are past due. Even if a loan is already delinquent, it “will show on a credit report,” says Edward Flick, senior vice president of consumer loans for Fulton Bank, Lancaster, Pa., “but it will also show that you did pay the obligations.”

But consumers are fearful. “Historically, we haven’t been as open and flexible as we could be,” says Jeffrey Neubert, senior vice president at Banc One Corp. in Columbus, Ohio. “People think if they call and say there’s a problem, there’ll be a padlock on their front door.”

If banks seem more flexible now, it’s because there are “more people having troubles today,” says David Fronek, executive vice president at INB National Bank in Indianapolis. “The help a bank can give hasn’t changed very much.”

Such creditors can waive payments, extend a due date or extend the length of a loan, reducing the payments. They can accept interest-only, temporarily, or consolidate several loans or take additional collateral.

What they do depends on the situation and their assessment of the customer’s problem. It may be temporary, “like they overspent at Christmas,” says Phillip Wilson, senior vice president for credit administration at San Diego Trust & Savings Bank. They may have unusual medical bills, which they could handle “if they could have no car payments for three months,” Fronek says. It may be longer-term--a job loss or a cut in hours.

“The people who make the judgment calls have to assess both willingness and ability to pay,” says Gail Wasserman, an American Express spokesman in New York. “The most difficult are the ones with terrific willingness but no ability to pay. The hardest to deal with are the ones with no willingness, but you suspect an ability to pay.”

“There are times when there are no rewrite terms or conditions to solve the situation,” Neubert says. Rewriting a single loan, moreover, may not ease the situation. The consumer may then be referred to one of the nonprofit, creditor-supported Consumer Credit Counseling Service offices nationwide. There all his debts are reviewed, his various creditors contacted and an overall repayment plan drawn up--sometimes involving a single consolidated payment, to be distributed by the counselor.

Even when a workout is “successful”--i.e. a plan was worked out--it may not be a success in the fulfillment. No one seems to track or tally the outcome, though many rewrites become delinquent again. “Some work and some don’t,” Fronek says. “You try to anticipate and assess how sincere someone is, but more obstacles come up.”