WASHINGTON - 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.
The new pilot program could involve as many as 50,000 people. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower's financial situation, up to 40 percent.
"There's obviously a financial benefit to the financial institutions to step up to the plate right now," said Susan Keating, president and chief executive of the National Foundation for Credit Counseling, which has 108 member organizations around the country. "We absolutely support the proposal."
Amid rising job losses, consumers - even those with strong credit records - have been defaulting at high levels on their credit cards. Banks already battered by the mortgage and credit crises are bleeding tens of billions from the losses.
The proposal pitched to federal regulators by the Financial Services Roundtable, which represents more than 100 big banks and other financial companies, and the Consumer Federation of America, would allow lenders to reduce by as much as 40 percent the amount of credit card debt owed by deeply indebted consumers in a pilot program.
Nearly all the biggest credit card banks have agreed to such a program, in which lenders would forgive as much as 40 percent of the amount consumers owe, allowing them to pay back the remainder over time.
Current government rules don't allow lenders to offer repayment plans that reduce the amount owed and borrowers to repay the balance over several years.
In cases where the principal can be reduced, borrowers normally are required to pay off the remainder over months.