Ah the banks are so kindhearted as they send many credit cards offers to the newly bankrupt-- must be that charitable XMAS spirit.
From today's NYT:
<Newly Bankrupt Raking In Piles of Credit Offers
By TIMOTHY EGAN
TACOMA, Wash., Dec. 9 - As one of more than two million Americans who rushed to a courthouse this year to file for bankruptcy before a tough new law took effect, Laura Fogle is glad for her chance at a fresh start. A nurse and single mother of two, she blames her use of credit cards after cancer surgery for falling into deep debt.
Ms. Fogle is broke, and may not seem to be the kind of person to whom banks would want to offer credit cards. But she said she had no sooner filed for bankruptcy, and sworn off plastic, than she was hit with a flurry of solicitations from major banks.
"Every day, I get at least two or three new credit card offers - Citibank, MasterCard, you name it - they want to give me a credit card, at pretty high interest rates," said Ms. Fogle, who is 41 and lives here. "I've got a stack of these things on my table. It's tempting, but I've sworn them off."
If it seems odd to Ms. Fogle that banks would want to lend money to the newly bankrupt, it is no mystery to the financial community, which charges some of the highest interest rates to these newly available customers.
Under the new law, which the banking industry spent more than $100 million lobbying for, they may be even more attractive because it makes it harder for them to escape new credit card debt and extends to eight years from six the time before which they could liquidate their debts through bankruptcy again.
"The theory is that people who have just declared bankruptcy are a good credit risk because their old debts are clean and now they won't be able to get a new discharge for eight years," said John D. Penn, president of the American Bankruptcy Institute, a nonprofit clearinghouse for information on the subject.
Credit card companies have long solicited bankrupt people, on a calculated risk that income from the higher interest rates and late fees paid by those who are trying to get their credit back will outweigh the losses from those who fail to make payments altogether. The companies also directed many of those customers toward so-called secured cards, which require a cash deposit.
But the new law makes for an even better gamble for lenders, consumer groups say. It not only makes bankrupt debtors wait eight years to clear their debts again, but it also requires many of those who do go back into bankruptcy to pay previous credit card bills that may have been excused under the old law.
Bankers defend the practice of soliciting the newly bankrupt, saying it gives them a chance to build a new credit history.
"The people coming out of bankruptcy need an opportunity to get back on their feet," said Laura Fisher, a spokeswoman for the American Bankers Association, the industry's largest trade group.
"If you take away the opportunity to get credit," Ms. Fisher said, "it's like taking away the want ads from a job-seeker."
But consumer groups say the new law has put millions of Americans at risk of being in a continuous debt loop through their credit cards. And while the banks have taken a short-term financial hit because of the new filings - leaving banks holding the bills - they will benefit in the long run because the new law makes it much easier to make money on people who live near the edge every month on their credit cards, some consumer groups say.
Credit cards are the most profitable part of the banking industry, with late fees and high interest charges helping make them so. Last year, more than five billion solicitations for new cards were sent out, nearly double the number from eight years ago.
"The whole business model of the credit card industry is built around outstanding debt," said Ellen Schloemer, a researcher at the Center for Responsible Lending, a nonprofit group that tracks lower-middle-class financial issues, based in Durham, N.C. "This is the only industry that calls people deadbeats when they pay all their bills every month."
Among bankers, policies differ in how to approach the newly bankrupt. Bank of America does not give credit cards to people who have filed for debt protection, said Betty Riess, a bank spokeswoman.
However, because there is a delay between a bankruptcy petition filing and a credit report showing the debt consolidation, the bank may still be sending offers to someone who has filed, Ms. Riess said.
Citigroup, whose credit card offers have piled up in Ms. Fogle's home, has its own internal credit rating system that does not always rule out the bankrupt.
"We use direct mail to find many of our new customers," said Samuel Wang, a Citigroup spokesman, in an e-mail message.
As of the end of October, 2,010,567 people had filed for bankruptcy protection this year, a modern record, federal bankruptcy court officials say. In just over two weeks of October, more than 600,000 people filed petitions, leading to long lines outside courthouses across the country, and clerks swamped with petitions.
The debtors were rushing to beat an Oct. 17 deadline when the most sweeping changes in bankruptcy law in a quarter-century took effect.
Most of the newly bankrupt filed under Chapter 7 of the code, which allows them to expunge many unsecured debts. The new law makes it much more difficult to erase debt; it increases the cost of filing and adds requirements like credit counseling.
The banking industry worked in Congress for nearly 10 years to pass the law, and critics say it gave them everything they wanted to increase profits from people prone to debt. Bankers say the law makes it harder for people to abuse the system.
"The hidden agenda of those who wrote the new law was death by a thousand cuts," said Travis B. Plunkett, legislative director of the Consumer Federation of America, which opposed the law.
Opponents, including a group of bankruptcy law professors, argued that the changes gave the banking industry too much of an advantage.
"In our view, the fundamental change over the last 10 years has been the way that credit is marketed to consumers," the bankruptcy professors wrote in a letter to the Senate this year.
"Credit card lenders have become more aggressive in marketing their products, and a large, profitable market has emerged in subprime lending. Increased risk is part of the business model."
Ms. Fogle would seem to be a perfect candidate for long-term debt to credit cards. Though she works regularly as a nurse at Good Samaritan Hospital here, earning $16 an hour, and has health insurance, she said a health emergency pushed her into debt. Last year, she needed surgery for uterine cancer, which caused her to lose days of work and income. Credit cards made up the difference, and soon she was $15,000 in debt.
She filed for protection of the courts in late August, and her debts are now removed. "My plan is to lay off credit cards until I can really afford them," she said. "But it's tempting. I would like to have one in case of emergency."
Ms. Fogle said she was trying to stick to a disciplined new pattern with her finances. "I try to buy only what I need, instead of what I want," she said. "But there are small things that I want - a latte, every now and then, taking my kids to the movies."
The credit card offers inform Ms. Fogle that she is pre-approved, but at higher interest rates - 23 percent or more, which is typical for offers to the newly bankrupt.
"It's obvious what they're trying to do here - start people off with a fresh credit card at a much higher rate than before," she said.
Nearly 60 percent of all credit card holders, about 85 million Americans, carry a balance - that is, they do not pay off the entire debt, according to the bankers' association.
The average debt among those with a monthly balance is $9,000, said the Consumer Federation of America in a recent report. Paying just the monthly minimum - usually 2 percent of the balance - on $9,000, it would take 42 years to pay off the debt, at a typical 18 percent interest rate, the consumer group calculated. Since that study, some banks have raised the minimum to 4 percent.
Opponents of the new bankruptcy law argue that it did not put new restrictions on credit solicitation and will turn the courts and the government into private collection agencies for bankers.
While bankruptcy filings increased 17 percent over the last eight years, credit card profits went up 163 percent to $30.2 billion, according to a report filed with the House Judiciary Committee by opponents of the new law.
"In the eight years since the credit industry first came to Congress seeking relief from the rising rate of personal bankruptcy filings, the extent of credit has not been curtailed, nor have the industry profits been diminished due to bankruptcy filings," Congressional opponents wrote in their report while the bill was under consideration.
Americans owe $800 billion in credit card debt, more than triple the amount from 1989, and a 31 percent increase from five years ago, according to a recent report, "The Plastic Safety Net," by the Center for Responsible Lending, and Demos, a research group based in New York.
The study found that a third of low- and middle-income American households used credit cards for basic expenses - rent, groceries and utilities - in any 4 of the last 12 months.
Those with the worst credit card debt were people ages 50 to 64, who owed $9,124 on average, the study found.
"The people I'm seeing right now, they're mostly middle or lower middle class," said Jack Burtch, a bankruptcy lawyer in Washington State. "In a good many of the cases, credit cards are what got them into trouble. And I don't see how credit cards will get them out of it."
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