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Bankruptcy Reform and Credit Card Losses

posted by Elizabeth Warren

In 2004, when more than 1.6 million households were filing for bankruptcy, the credit card default rate was 4.09%.  The credit card lenders claimed that bankruptcy cost every American family $400 in discharged debt.  In 2005, the default rate jumped when more consumers filed for bankruptcy in anticipation of the new bankruptcy amendments.  Now that burst of consumer bankruptcy filings is over, and the bankruptcy filing rate is less than half that of 2004.  But the credit card default rate is right back where it was in 2004.

                 Jan 06: 6.05%
                 Feb 06: 4.73%
                 Mar 06: 3.75%
                 Apr 06: 3.95%
                 May 06: 4.24%
                 Jun 06: 4.19%
                 Jul 06: 3.99%
                 Aug 06: 3.95%
                 Sep 06: 4.15%
                 Oct 06: 4.09%
                 Nov 06: 4.19%
        Source: CardData (www.carddata.com)

These data support the idea that an extraordinary event like two million families thundering into bankruptcy in fear that they will lose access to bankruptcy drove up default rates.  But the numbers also suggest that bankruptcy was not pushing up the credit card default rate in 2004 since the rate has returned to about the same point in 2006--after the bankruptcy filing rate was cut in half. 

These data also indicate that today there are about as many families who are struggling financially as there were in 2004, but that today a whole lot more of them are not getting help in bankruptcy. 

Finally, the data raise the question about what the credit industry really got in the bankruptcy amendment.  Post-amendments, about the same proportion of debt remains unpaid.  It seems that the legislation took away protection from the families, but it didn't give them any more money to pay their creditors.


I hesitate to venture into this rarified atmosphere of Academia, but as a consumer practitioner I have noticed a tendency among debtors to suffer the indignities of bottom feeding debt collectors rather than the indignities imposed by Congress. True creditors are not any better off, because they still write off debt, but now it is now bought up at deeply discounted rates by a developing cottage industry of bottom feeders who attempt to collect by being obnoxious. I have actually had clients move and leave no forwarding address to escape such practitioners as Collect America.

Ms Warren, it looks like you've unearthed an important nugget in the credit card blame game, tightening bankruptcy laws did nothing. When it's all said and done, perhaps what matters most is the amount of money that was borrowed versus the amount of total interest that is paid back on the borrowed money. Especially when we are talking about consumeable products that either obsolete themselves immediately (food, gifts and vacations), or items that merely last a couple of years. Either way, does society really want people paying interest charges years after the purchased product no longer exists? This becomes an indentured way of life and flies in the face of those trumpet the value of "freedom".

I have proposed a "50% total interest paid" cap compared to the original amount that was borrowed. Not only does this not hurt anybody, it actually is pro environment as it curtails overuse of valuable resources from people woring extra hours to try and pay off debt they should have never owed in the first place.

In my opinion Credit Protector is another credit card program that is hurting those unfortunate enough to not see it for the complete scam that it is. I detail both of these issues on my website, http://www.shareamillion.com on pages two and three.

Some say "it's all the fault of the consumer, they shouldn't borrow money if they can't afford to pay it back". That line of thinking usually comes from people with more wealth to begin with. Additionally, It's quite possible that their wealth was created off of the same people doing all along what that they now condemn, borrowing money via a credit card. So now they want it both ways, they want the wealth generated from people who use credit cards to buy things on credit, but they don't want to hear about ensuing problems equally caused by the credit card companies pay down policies.

-Alessandro Machi

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