Bankruptcy Reform and the Credit Card Industry – When a Good Plan Goes Bad
In January of 2003, the Consumer Federation of America released a study free Facts about Consumer Debt and Bankruptcy. The study compiled data from the Studies by the Congressional Budget Office, the Centralized Deposit Insurance Corporation, and self-determining economists link to the rise in consumer bankruptcies frankly to the rise in consumer debt.
HOW MUCH IS THE Mean AMERICAN FAMILY Obliged TO THE CREDIT CARD COMPANIES AND HOW DID THEY GET THERE?
Currently, there are well over a billion credit cards in circulation. The mean American household has about a dozen credit cards and carries a balance of more than $10,000. Approximately 60% carry the balances owed from month to month. In fact, Americans owe more in credit card debt than they do for education.
Since 1997, credit card issuers have nearly doubled the amount of credit they offer to consumers, to more than $3 trillion dollars. In fact, credit card loans have had the fastest growth of any type of consumer loans.
Between 1997 and 2002, rotating debt augmented from $554 billion to $730 billion, the vast margin coming from credit cards. During the same period, between 1997 and 2002, credit card companies augmented the number of mailed solicitations to consumers from 3 billion to 5 billion. To place it into perspective, about 50 mailings/offers went out to each American Household in a year, not including telephone solicitations, TV commercials, etc.
In addendum, direct solicitation to institution students has also augmented. Most cards are available to many colleges and students students that have small to no income, no established credit description and with no parental signature vital. Student loan provider Nellie Mae found that in 2000, 78% of undergraduate students had a least one credit card. This is up 67% from 1998 figures. A 67% increase in 2 years. The mean balance for an undergraduate in 2000 was $2,748. In 1998 the mean balance was $1,879. Nearly a 50% increase. Not to be outdone, the mean modify student leaves with a degree, most likely a hefty student loan and an mean credit card balance $4,776.
To peer into the future (from a lending perspective and potential profits), here is another fact. In 1998, more than one quarter of all institution students reported paying late on a credit card at least once in the before 2 years and more than one quarter also reported using a cash development to pay their debts. This type of actions will most likely lead to the student bearing the classification of high risk on their credit rating, which in turn will result in them paying a higher appeal rate when obtaining future lines of credit. And statistically, high risk borrowers typically carry a higher debt burden, pay more appeal, usually make the nominal payments and suffer more defaults.
HOW MUCH IS IT Assess THE Mean AMERCAN FAMILY TO Benefit THESE DEBTS AND HOW MUCH ARE THE CREDIT CARD COMPANIES MAKING?
In 2000, about one-third of Americans with incomes below the poverty line spent more than 40% of their income on debt refund. Those households with moderate income spent 20% on debt refund and middle income families spent about 14%.
Credit card companies earn about 75% of their revenues from the appeal paid by borrowers who do not pay in full each month. Diligence analysts assess that making nominal monthly payments on a credit card with a balance of $2,500 will take 34 years to pay off and would exceed 300% of the first principal balance owed. Place all these facts collectively and it doesnt take a rocket scientist to figure out why they target low income families and start students down a path of long term debt refund.
Some credit card companies have instituted charges or even given up for lost credit cards for consumers who pay in full each month, preferring customers with large credit balances that pay nominal monthly payments.
Taking a look at credit card profitability, Bankcard profits augmented in 2001 to their second highest level in the last 5 years (3.24% of outstanding balances). So you dont have to pull out your calculators; thats about 23 billion dollars in profits. The margin of growth can be frankly attributed to, back then, the increasing appeal rate gap between the target rate set by the Centralized Reserve and the appeal rate charged by card issuers to consumers. For an model, in 2001, the Centralized Reserve cut appeal rates by 4.75% but major bankcard issuers cut their rates by only 1.35% on mean.
WHO Questioned FOR BANKRUPTCY REFORM?
Now lets go to the year 1995 before all of this was experience. Why? In 1995 creditors urged then Head Clinton and House of Government to set up the Inhabitant Bankruptcy Review Commission. Thats right, the new Bankruptcy Reform Laws that were enacted last year, has been being pushed by the Credit Diligence since 1995. Creditors were pushing for legislation that would restructure the guidelines for filing a Stage 7 Bankruptcy (known as a honest bankruptcy where the vast margin of unsecured debts (credit card companies fall under this class) are eliminated). The new restrictions would force many consumers that once would be eligible for a Stage 7 to file under for bankruptcy safeguard under Stage 13 (which is sort-out) and further demand that some type of payment be made to the unsecured creditors, which in most Stage 13 filings at that point in time was never the case.
It is fascinating to point out that the credit card companies were the ones requesting bankruptcy reform. They were the ones saying that people are abusing the system. Not Bankruptcy Judges, Trustees, House of Government, consumer groups, etc. An article published in the Inhabitant Association of Bankruptcy Practitioners set by Mary Rouleau in January 2003 free The Truth About Bankruptcy showed that the panel was formed and the initial drafts of the report showed that the credit diligence did not set up the burden of proof that people were abusing the system or how they were suffering tremendous losses. So, you would reckon that that would be the end of it. Sad to say about this next turn of events, even sadder still is how is speaks volumes about how laws are passed in this country, is that the credit diligence sent a letter to House of Government denouncing the Inhabitant Bankruptcy Review Commissions (NBRC) initial opinions and started to spend multi-millions of dollars on public family member campaigns and lobbying efforts to bring into disregard the NBRC and long tale small, continued their efforts until the new laws were enacted.
The supporters of this law (the credit card diligence) said it was needed to help curb the massive abuse of people who filed for Stage 7 bankruptcy that wanted to simply walk away from their fiscal obligations. Opponents (economists, consumer groups, bankruptcy judges/attorneys) said that the changes would be mainly hard on low-income effective people, single mothers, minorities (fascinating that the credit card diligence has been targeting these high risk individuals for the past decade, while simultaneously perusing the law changes in bankruptcy.) and the elderly. In addendum, it would remove a safety net for those who have lost jobs or face mounting health check bills.
WHAT WERE THE BASIC CHANGES IN THE BANKRUPTCY LAW?
The law bars those with above-mean income from Stage 7 — where debts can be wiped out entirely — except under unique circumstances. Those deemed by a new “means test” to have at least $100 a month left over after paying certain debts and expenses must file instead a 5-year refund plot under the more restrictive Stage 13. The means test is a chart that provides the median family income for each state and the living expenses set by the IRS for day to day living expenses (food, transportation, clothing). You must use those allotted amounts. To see what the mean is in your area, go to http://www.usdoj.gov/ust
In addendum to this means test, an individual wishing to file for relief under Stage 7 must first seek credit counseling services and receive a certificate of liquidation.
Basically, anyone in quest of to file a Stage 7 bankruptcy has to go to a credit counseling benefit that interviews the individual and conducts an analysis of their overall fiscal circumstances to determine if they truly cant afford to pay back their debts. The credit diligence had hoped that by forcing someone to seek credit counseling, it would give them a better chance of recovering their money. Using the logic that people had money, they just didnt want to pay their credit card bills. If not, they still have the means test and the potential to recover a touch through a Stage 13 bankruptcy.
DID BANKRUPTCY REFORM Really WORK?
Lets take a look at the people who usually file for relief under Stage 7 bankruptcy, the so called abusers of the system. In 90% of all filings, one of three things occurred that forced the consumer to file for safeguard. The consumer suffered a job related issue (layoff, cut in hours), suffered a health check crisis or went through a divorce.
While it is right that Bankruptcy filings have been at an all time high over the past decade, it is also right that consumer debt has kept pace. Thanks to, yes, the credit diligence.
Studies have shown that most people do not want to file for bankruptcy relief. Even most bankruptcy attorneys will tell you that the margin of their clients come from exposure and not referrals. I can tell you from personal encounter having been involved in the field for the past 15 years that people dont look forward to having to file for bankruptcy. Most people are very nervous during the process and are overwhelmed by the nervousness of in quest of relief.
There was a study published by the Inhabitant Association of Consumer Bankruptcy Attorneys back in March 2006. The study concluded that forcing consumers into credit counseling a key provision of the reform Act, was a waste of money and did small to weed out the so called deadbeats trying to use bankruptcy to avoid paying their debts.
Additionally, there were six major credit counseling firms surveyed that dealt with 61,335 bankruptcy filers since Oct. 17, 2005. Out of those 63,335 people, only 3.3 percent of people in the study were eligible for a debt management plot and could avoid filing bankruptcy. The remaining 61,000 people got the relief they needed but not before costs a combined total of $4.7 million dollars in fees to the credit counseling agencies for their analysis and certificate of liquidation. Now remember, cccs has some new laws that are going to take effect here before long. One of the provisions of the new law is that anyone in quest of credit counseling that can not afford it, the benefit must be existing free of charge. So it will be fascinating to see how long a cccs company can offer to perform an analysis and issue a certificate of liquidation (which is vital in order to file for bankruptcy) showing that someone is insolvent and not get paid for it.
The above facts were no surprise to anyone in the diligence. Investigate showed before the law was passed that only about 3.6% of all people filing for Stage 7 would be candidates to file for relief under Stage 13. and diligence consultants also concluded that credit card companies could cut their losses by more than 50% if they would institute nominal credit program.
It is also fascinating to note that during the reform review process, diligence consultants concluded that if credit card companies would institute better nominal credit program, they would cut their losses by more than 50%.
So, why wouldnt they do that? Because lending to people who are a high credit risk is very profitable. More profitable to them than if they top secret the facts of people they would extend credit to. Remember that credit card companies earn about 75% of their revenues from the appeal paid by borrowers who do not pay in full each month. By loosening up their lending practices and issuing credit to people who are a high credit risk, they can charge them a higher appeal rate and make more money because they know that these consumers will just make their nominal monthly payments each month.
I would submit that the credit card diligence was banking on the new reform to limit the amount of American consumers that would be eligible to file for relief under Stage 7 and force them into credit counseling (where they would receive all of the money owed with some appeal) or at least force the margin into a Stage 13 were they would recover a excellent amount of it.
After looking at the facts how can one not see a sample and a feeling of distain for such practices? You have an diligence that is preying on people that they shouldnt be giving the type of high credit lines to. They double their efforts to entice new customers. Target students and low income people who they know will be obliged to them for years to come and at the same time, push to change laws that would stop those individuals that they have taken advantage of from getting the help they need when they suffer a job loss, divorce or a health check emergency?
On mean, 1 out of every 60 families went bankrupt last year. If you take into significance, high fuel costs, modifiable rate mortgages that are due to reset over the next several months (there are about $400 billion in loans that will rest this year and another $2 Trillion that are due to reset next year) and the amount of credit card debts the mean family is carrying, we will past that figure next year and the year after that….
As always, to learn about your fiscal options and managing you debt log onto www.debtreliefoptions.com.
Jon Noble
Staff writer
Debt Relief Options
asktheexperts@debtreliefoptions.com
Author: Jon Noble
Article Source: EzineArticles.com