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Calling Credit Card Lenders to Account

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Like everyone else in this country, I receive credit card solicitations. My friends receive credit card solicitations. Members of Congress and their staff receive credit card solicitations. Two friends of mine own dogs, both of which have received credit card solicitations (one actually has its own card, which its owner is kind and careful enough to pay on behalf of the animal). Most of us throw these solicitations away—we have enough cards already and hardly need yet another one. Occasionally, however, one will come in with a teaser rate so low that we cannot resist applying for it, and transferring balances over to it. Again, however, most of us who do that have the financial wherewithal to actually pay off the credit card balance within the six-month period during which the teaser rate applies.

But "we," for the most part, are the people who are likely to be reading this column—lawyers, accountants, appraisers, turnaround specialists, judges, members of Congress. We are sufficiently sophisticated (and sufficiently well-off) that we can handle the siren song that these credit card companies are singing. We are not lulled into the dangerous shoals to which they beckon us.

The credit card companies are not really aiming their solicitations at us, though. Here's how I know that. First is a credit card solicitation that I received from a credit card company (the name of which I will here mercifully omit) just a week or two ago. The card issuer, nationally recognized and one of the largest in the country, offered me a credit line of $50,000, with no annual fee, a teaser rate of 3.9 percent and a fervently-urged suggestion that I transfer the balance of any existing credit card debt to its card. After the initial six months, the rate on the card would go up to 14.9 percent (a very good rate, considering the industry). On the single small form that I was to send in to get my card, there was a block of fine print, asking that I initial in the space indicated to confirm that I had an annual income of at least $30,000.

That brought me up short. $30,000? This credit card company was willing to issue a credit line of up to $50,000—and was encouraging the customer to use that credit line quickly by transferring balances from other cards, enticing with a teaser rate—to someone who grosses only $30,000 a year. Now realistically, how could the credit card company believe that this debt could ever be repaid? Someone who makes only $30,000 a year, or $2,500 a month before taxes (about $2,000 after taxes), who is paying for a car ($300 a month?) and a house or apartment ($800 a month?) and who buys food, pays for utilities and so forth ($500 a month?), will have a whopping $400 left to put into savings, pay for retirement, go to a movie—and pay credit card bills. Actually, the amount will probably be less, when we take into account car insurance, car repairs, gas, furniture purchases, clothing, health insurance (assuming the customer has health insurance available). Now, how much would the credit company insist on as a minimum monthly payment? Enough to at least cover the interest accrual, I would hope. But at 14.9 percent, on $50,000, that would come to more than $620 a month! That's at least $200 a month more than a person of that level of income likely has available even if all he or she does after paying for housing and the car is make payments on the credit card. And that amount does not begin to amortize the debt. In other words, someone with an income of $30,000 literally cannot qualify for a $50,000 loan at 14.9 percent interest—yet that is exactly what was being solicited!

Surely, the credit card issuer had to realize what it was doing. It had to know that its encouraging someone with an income of $30,000 to draw down $50,000 in available credit would inevitably lead to default. Surely, the solicitor had to have some in-house data that would reflect how much discretionary income the average family (or even individual) making $30,000 might have available to him or her. How could the credit card company possibly encourage someone to take maximum advantage of the available credit line, yet place such a low threshold for qualification? Yet here it was—in my hands—a solicitation that all but begged me to take maximum advantage of this new credit availability, asking for nothing more than a certification that I made at least $30,000 a year.

Credit card companies are still pressing Congress for bankruptcy reform, complaining that bankruptcy laws are to blame for the rise in credit card default rates. Balderdash. A third grader could do the math that confirms that credit card companies—including highly reputable credit card companies—have only themselves to blame for their high default rates. I agree with the credit card companies that Congress should consider reform. Congress should take a hard look at the rules and regulations that currently govern credit card banks, and how they carry and report "non-performing" credit card debt. Perhaps the House or Senate Banking Committee should be taking a closer look at the extent to which credit card companies are foisting their profligacy onto the investing public via the securitization of their loan portfolios.

Recently a woman who had voluntarily filed a chapter 13 bankruptcy came into court. With an annual income of just over $18,000 a year, she had more than a dozen credit cards. She was carrying just over $136,000 in credit card debt. How could that have happened? Very little of the debt was recent—in the past year she has been doing little more than making the minimum payment on each and every one of the cards, and filed only when a recent reversal in her income situation gave her no other choice. I want to know who was the last credit card issuer, and how did that issuer ever justify sending this woman a card? Oh, and let's not assume that we are talking about some young, inexperienced profligate. The woman is 53 years of age.

Consider this woman's case in light of the recent proposed reforms to our bankruptcy laws. The means test would never have picked this woman up. Yet she filed chapter 13 voluntarily. Under the current law, she can propose a plan that repays at least a portion of this debt. Under the proposed legislation, adequate pro-tection payments and changes in the valuation standards, coupled with a new rule that says that credit card charges within 90 days of the bankruptcy filing are non-dischargeable, would have made her voluntary choice of chapter 13 ludicrous. She would have filed chapter 7 instead, repaying nothing to these creditors. Or perhaps she would have simply not filed at all—in which case she would have faced the prospect of paying on this impossible debt for the rest of her life. After all, at the minimum monthly payment, the average credit card debt of just $10,000 will take about 27 years to repay.

In the meantime, The Philadelphia Inquirer (August 2, 1998) reported in its article "As the Market Mushrooms, Business Leaders Take Stock" the following information: "at MBNA Corp., the local company whose top executives have dominated The Inquirer's best-paid list for the last three years, Chairman Alfred Lerner collected paper profits estimated at $600 million in 1997 alone... many of the best-paid executives in the region work for highly profitable financial services companies such as MBNA Corp...MBNA accounted for four of the 10 top earners, excluding options profits, in 1997; over the last three years it has spent twice as much on its top five as any other company."

It is very difficult to shed too many tears about the "terrible losses" that credit card companies are "forced" to foist onto the rest of the American public in the form of higher credit costs, once we realize how much their executives are taking home in salaries every year from their "losing ventures."

Should there be bankruptcy reform? Yes! By all means! Many of my colleagues are champions of chapter 13 (as am I), because it delivers repayment to creditors while salvaging the financial (and sometimes emotional) futures of real people. We want to see laws that do more than say that they encourage chapter 13 as the preferred bankruptcy alternative. We want to see laws that actually achieve that end. My colleagues are no fans of fraud, either, and we prefer a bankruptcy system that roots out fraud. The bankruptcy laws can be improved to aid in that effort.

But should there be reforms whose real impact (if not real intent) is to cushion the losses that creditors bring on themselves while maximizing their profits, all at the expense of the millions of people who cannot afford expensive lobbyists in Washington? No. No. No.

Journal Date: 
Tuesday, September 1, 1998

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