Thursday, January 5, 2006
Having more credit than money,
Thus one goes through the world
— Johann Wolfgang von Goethe, Claudine von Villa Bella (1776)
It is popular but unfair to criticize credit card companies for their recent successful efforts to persuade congress to change the bankruptcy laws. Rather than criticize we should acknowledge all they have done for the consumer. Last year the industry sent out more than 5 billion solicitations inviting us to obtain their cards. It is obvious that among the 5 billion sent out a few went to people to whom the invitation should not have been issued and these people, being irresponsible, accepted the invitation and ran up huge balances that they could ill afford to pay. Some even went so far as to take bankruptcy thus leaving the credit card issuer holding the bag.
That behavior did not escape the attention of the card issuers who tried all manner of things to encourage errant consumers to be more responsible. Some charged usurious rates of interest hoping that would encourage the cardholder to pay off the balance in full each month. Others introduced significant penalties for late payments hoping that would teach cardholders to be more financially responsible.
When none of those things worked and borrowers persisted in trying to take advantage of their generosity, the lenders banded together and went to congress demanding a change in the bankruptcy law, bankruptcy having been the last shield of the no-good debtor. The credit card companies reportedly spent 10 years and more than $100 million of their hard earned money to explain to congress why a reform of the bankruptcy law was needed. Their efforts were successful and today we are blessed with a law that will help the poor among us become more financially responsible.
Under the former bankruptcy law the unscrupulous debtor could take advantage of credit card issuers by taking bankruptcy and then promptly accepting the generous borrowing offers sent out by lenders who, willing to give the debtor a second chance, offered the newly bankrupt credit cards once again. The unscrupulous who accepted those offers had only to wait six years before repeating the entire process and wiping out all their debts. It is perfectly obvious that the effect of such a law is to simply encourage irresponsibility among the poor and to discourage banks and other lenders from being generous with their credit. In 2004 more than 2 million people filed for bankruptcy and it goes without saying that among the two million were many who had taken unfair advantage of the credit card companies by discharging the debts owed the companies.
Thanks to the good work of credit card companies, the new bankruptcy law makes it more difficult for the consumer to take unfair advantage of the credit card issuer. No longer can the cardholder look forward to depriving the credit card companies of their just desserts by taking bankruptcy every six years. Henceforth cardholders will have to wait 8 years between bankruptcy filings, something that should have the immediate effect of making borrowers think twice before incurring debt they cannot repay. An even greater encouragement is found in the provision that makes it much more difficult to simply wipe out the debt. In the future debtors may find that they will have to repay some of the debt they were formerly able to avoid paying.
Credit card companies are not simply resting on their laurels, however, nor do they bear any grudges. Even though many of their debtors rushed to take bankruptcy before the new law went into effect in order to fully discharge their debts, the credit card companies bear them no ill will. They have been courting their former cardholders encouraging them to once again obtain credit cards. Solicitations are reportedly going out in great numbers to the newly bankrupt.
Criticized by some professional do-gooders for seeming to take advantage of the vulnerable among us by encouraging them to once again go into debt, the credit card companies have been quick to respond explaining that their generosity enables the newly bankrupt to build a new credit history. Laura Fisher, a spokesperson for the American Bankers Association, was quoted in the New York Times saying: “The people coming out of bankruptcy need an opportunity to get back on their feet. If you take away the opportunity to get credit it’s like taking away the want ads from a job seeker.” What she didn’t say was that the bank’s profits would be reduced if the credit card issuers did not encourage those who can least afford the high interest charged on unpaid balances to continue to own, use and pay the banks handsomely for the privilege of living beyond their means. I’ll say it for her.