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Creditors Trash Talk Debtors, But How Do They Really Feel?

posted by Elizabeth Warren

"Revealed preferences" is a great term from economics.  It means pay attention to what actors do, not to what they say.  Creditslips' own Katie Porter has put together a fascinating study of bankruptcy and the credit industry in her new paper, "Bankrupt Profits: The Credit Industry's Business Model for Post-Bankruptcy Lending." She uses revealed preferences to inform the debates on bankruptcy abuse.  She says, in effect, stop listening to what the credit industry says about the opportunism or moral slackness of people who file for bankruptcy.  Instead, look at how the card issuers treat people who are bankrupt. 

Creditors talk the talk, but do they walk the walk?  Katie's got the numbers.

It's a great research set up:  If the industry really thinks most people who file for bankruptcy are cheats, charlatans and the like, then they should avoid the recently bankrupt.  Character doesn't change.  But if they really think the people who file for bankruptcy try to pay if they possibly can, then the card issuers will solicit them for new business post-bankruptcy.

Porter has the data:  The credit card companies try to scoop up these families like ducks scoop up June bugs.   Or, as the more scholarly Porter puts it, "empirical evidence on post-bankruptcy credit solicitation suggests that the industry sees bankrupt debtors as lucrative targets for high-yield lending."   

Either way, 96.1% of the debtors had received credit solicitations in the year following their bankruptcies--big, fat "we want to lend to you!" letters.  And 87.7% of the bankrupt debtors had received offers that explicitly mentioned their bankruptcies.  The revealed preferences are unmistakable:  When people are bankrupt, the card companies are ready to welcome them back to the debt-fold with plenty of new plastic.   

The post-bankrupt debtors are more attractive because they can't file bankruptcy again for eight years.  But if the card companies believed they were bad actors, then they should avoid these people anyway because bankruptcy isn't the only way to avoid paying.  Even at the height of the bankruptcy filings, more people defaulted on their loans and just walked away than chose bankruptcy.  Barring a bad actor from bankruptcy is not the same as getting a bad actor to pay.  These card companies who want to lend money must have concluded that folks in bankruptcy are not such bad actors after all.

The implications of Porter's work echo throughout the policymaking world--bankruptcy law, debt collection, credit card regulation.  The credit card companies may rail against the "bankruptcy abusers," but Porter's work suggests that they talk the talk, but they don't walk the walk.


I'm happy to see Prof. Porter's work support the anecdotal info that I've been picking up from debtors' attorneys here locally. The attorneys say that one reason they suspect for the heavy solicitation (apart from just the need to keep feeding the cash flow monster that is securitization) is that debtors on the other side of bankruptcy have less debt -- all the old credit card debt is gone, so if you are the first "new one," you are in a much better position to count on the debtor's having the cash flow to make monthly payments anew.

There is another irony here. Congress included in BAPCPA a specific requirement that all debtors participate in a financial management course as a prerequisite to obtaining a discharge. If debtors really learned their lesson, won't they spurn these new offers?

A certain type of debtor is now much less likely to have received a discharge. The "disorganized" debtor, who can't get his or her act together enough to complete credit counseling and debtor education, as well as all the paperwork required to file a bankruptcy and avoid dismissal (tax returns, pay stubs, and whatever the U S Trustee thinks is needed that day) won't be getting a discharge. If this type of debtor is a less desirable customer, then the increased paperwork requirements serve two purposes. The first is to keep the borrower who is in trouble in the "sweat box" a few months longer. The second is to in effect "qualify" the person who gets a discharge as a more desirable customer.

It's not just credit card 'offers' that literally flood the mailboxes of the recently bankrupt. Local car dealers are just as bad, if not worse ! The idea that a newly discharged debtor is just DYING to now get a new car is pretty obvious in the literal barrage of mail post-bankruptcy.

Now 2 years post-discharge I am STILL getting mailings from local dealerships trying to sell me a new car. With things like 'great deals', 'rebuild your credit', and on ad nauseum. Before I was even discharged, one local dealership kept mailing their flyers tucked into plain envelopes and sealed with a bit to scotch tape, over and over.. to the tune of 1 mailing in my box EVERY OTHER DAY ! After a few weeks of that nonsense, I wrote them a scathing letter back telling them to STOP, take me off their list, I was NOT in need of a vehicle and was NOT going to fall into their trap. I fear my letter burned the fingers of the postal workers, but it got my point across and they stopped their relentless pursuit. It was crazy.

Because I had previously opted out with the CRA's I didn't get the usual flood of CC offers others I know have, but a few snuck through and now that the 2-year period for opt-out has expired, I'm getting more and more credit card 'offers'. My major reason for filing bankruptcy was never credit cards, but I'm still loathe to dive back in to that credit swamp, especially at the nose-bleed interest rates these sub-prime cards carry. Clearly, they don't think we're pariahs at all, or the 'cheats' the credit industry portrayed bankrupts as being. All they see is another potential run of years of pouring money into their pockets, possibly waiting for more defaults so they can make even MORE money - No thanks. At my age, my money's going into retirement plans !!

This comes a no surprise to consumer bankruptcy lawyers, nor to almost anyone with hands-on knowledge of that arena. If there was any puzzlement as to the level of cynicism from that direction towards the politics of the credit industry, this should go a long way in explaining it.

If the credit card industry was actually taking the losses it claims, I doubt they would be as interested in doing business with folks that have filed for bankruptcy. In reality, the credit card industry and its debt buyers collect a fairly large portion of these discharged accounts. Many of these post-bankruptcy credit offers require the debtors to pay back discharged accounts in order to get the new credit cards. Other creditors use passive collection techniques involving failing to report the discharge and leaving the balances on the debtors' credit reports. They wait till the debtor hits a recapture point like when they to buy a house or need to refinance their mortgage and collect the accounts at the closing. Fannie Mae, Freddie Mac, and FHA regulations require charge-off accounts with balances to be repaid in order to close. The creditors refuse to acknowledge that the accounts are discharged when the mortgage broker or debtor calls to get a letter confirming that the account is discharged. FCRA disputes rarely work on discharged accounts. See the recent opinion, in Acosta, as to why. Many mortgage underwriters refuse to accept the discharge order as proof that the account has been discharged in the face of the credit report showing a balance due. The debtor must prove that the debt was not reaffirmed or held to be non-dischargeable. The credit card companies keep a percentage of what they recover on their own trade lines and return the rest to the debt buyers that actually own the accounts. Lately, though, we have been seeing large volumes of Chapter 7 debt, from no asset cases, being sold by the credit card companies, after discharge, to debt buyers. There are auction sites on the internet that facilitate the sale of these discharged accounts. The debt buyers wait anywhere from 1-3 years, and then start active collection efforts using telephone harassment, dunn letters, and credit reporting to collect the debts.

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