Why Is Credit Card Debt Way Down?

I noted in a recent post at this blog that credit card debt levels have fallen dramatically.

A new study suggests, however, that much of this decline in substantial part due to charge offs of bad debt by credit card companies as it is to consumers borrowing less (perhaps due to reduced credit lines) and paying down their balances (perhaps due to increased minimum payments).

When the charge offs are due to bankruptcy, a negotiated debt forgiveness (perhaps in connection with a credit counseling agency agreement, or based on a demonstrated inability to pay in full), or the death of a card holder with an insolvent estate, this is legitimate. The amount of debt outstanding really is lower, and the burden that the debt is placing on consumers has been removed from the economy.

But, most often, a charge off simply means that the bank has determined that a statistical portion of its defaulted debt is unlikely to be ever repaid. Those debts are still in the hands of collection agencies that are actively pursuing credit card holders in an attempt to collect them. So, the debts that the credit card company assumes are worthless are still a thorn in the side of debtors who are trying to get back on their feet.

Another possibility in the case of charge offs (unlikely to be a large part of the recent numbers) is that the statute of limitations has run on the debt. It is still legal to try to get people to pay debts when the statute of limitations has run, because the statute of limitations defense only works if a debtor knows to assert it. But, query if it should be an unfair debt collection practice to collect a debt when the statute of limitations has run. A simple change in the law of civil actions, to make statute of limitations part of the prima facie case of the plaintiff's cause of action, as a general rule, rather than a defense to a cause of action, would have that effect, effectively ending a small, but notable instance where unrepresented parties are unfairly disadvantaged in an important way by the court system. Since statute of limitation usually are based upon information in control of the plaintiff, it wouldn't be an unreasonable change to make.