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Impact of Credit Card Use on Consumer Bankruptcies

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Much has been written in the press about the record number of consumer bankruptcies, but there has been little analysis of the reasons for this surge in con-sumer filings. As consumer bankruptcy filings have reached new heights, so has the amount of credit card debt. The statistics (see table, page 42) tell the story of this escalation.

The numbers demonstrate that the receivables and filings have been rising almost in tandem. The magnitude of the rise has been greater for credit card debt than for the bankruptcy filings. Consumer bankruptcies have more than doubled from 449,129 in 1986 to 1,125,006 in l996, while credit card debt has increased five-fold from $82 billion in 1986 to $413.4 billion in 1996.

More than one-half of the increase in consumer bankruptcies since l986 occurred in l996 and l997. This recent rapid rise may be explained not only by the escalation of credit card debt in the preceding years but also by the fact that in l995 credit card companies made a record 2.7 billion direct mail solicitations.1 Moreover in l996, there were 2.4 billion credit card mail solicitations.2 Also from l995 to l996, credit card industry telemarketing expenses rose 30 percent from 18.6 to 24.1 million hours.3 The credit card companies have been saturating the public with their aggressive marketing tactics as they engage in a fierce competitive struggle for market share.

YearCredit Card Receivables U.S. Year-End In Billions Of Dollars4 Percent Increase Over Prior YearTotal Consumer Bankruptcy Filings5Percent Increase (Decrease) Over Prior Year

1986
1987
1988
1989
1990
1991
1992
1992
1994
1995
1996

82.0
101.0
122.8
146.5
172.6
188.6
201.7
241.2
287.5
360.4
413.3

17.8
23.2
21.6
19.3
17.8
9.2
6.9
19.6
19.2
25.3
14.7

449,129
492,850
549,831
616,753
718,107
872,438
900,874
812,898
780,455
874,642
1,125,006

31.6
9.73
11.6
12.2
16.4
21.2
3.26
(9.77)
(3.99)
12.1
28.6

(Calendar-Year 1997 Figures Are Not Yet Available.)


Although the credit card industry maintains that its underwriting standards in issuing credit cards are sound, the increase in total credit card debt certainly raises the margin for error. Likewise, the phenomenal growth in credit card debt must be a major contributing factor to the surge in consumer bankruptcies.

Interestingly enough, debtors in consumer bankruptcies cite credit cards as a major cause of their bankruptcies. A CNN/USA Today/Gallup Poll on personal bankruptcy conducted in May l997, which involved a sample of 522 chapter 7 debtors from all over the country, found that 63 percent of debtors filing said that the major reason for their bankruptcy was "credit card bills." An additional 16 percent stated that credit card bills were a minor reason for their bankruptcy, while 21 percent said it was not a reason. (No other category received such a low response as not being a reason for filing chapter 7.) A job loss or a pay cut both ranked second to credit card bills as major reasons for going bankrupt according to 38 percent of the respondents, followed by mismanagement of personal finances with 37 percent. In this Gallup Poll, only 28 percent of debtors blamed medical bills for their bankruptcy, and 13 percent cited divorce or marriage break-up.

Harry A. Sherr, U.S. Trustee for Region 15, recently provided written questionnaires to 3,025 chapter 7 debtors in San Diego asking them to identify the contributing factors for their bankruptcies. 1,539 of the respondents cited overextension of credit, while l,447 reported that it was their credit cards or credit lines that caused this overextension. The generally accepted reasons for filing bankruptcy of "job loss/business failure" were reported by 1,240 of the debtors, divorce by 473, and catastrophic medical expenses by 331. Unlike in the Gallup Poll, the respondents were not asked to rank or order their responses into major and minor reasons. In both polls the respondents were given the opportunity to assign multiple causes for their filings.

Those attorneys who handle consumer bankruptcies on a day-to-day basis can testify to the accuracy of the above surveys. Their validity is further demonstrated by the observation of many debtors’ counsel that most chapter 7 debtors owe credit card debt in excess of or equal to their annual income at the time they file. In the chapter 7 consumer cases filed by our firm for the 60 days preceding November 23, l997, it turned out that the total amount of credit card debt scheduled by debtors was on the average 136 percent of their highest annual income in either the current year or one of the last two years. Obviously these latter numbers are subject to the challenge that one law firm’s filings over a short period cannot be statistically significant. We welcome other debtors’ counsel to share similar information on cases they have filed so that sufficient and statistically significant data can be developed.


Footnotes

1American Bankruptcy Law Journal Spring 1997, p. 264, "Credit Card Defaults, Credit Card Profits, and Bankruptcy" by Professor Lawrence M. Ausubel. [Return to Text]

2National Bankruptcy Review Commission Report, Preface page v. [Return to Text]

3"Expanding Credit Card Debt: The Role of Creditors and the Impact on Consumers" Consumer Federation of America report and press release, December 16, 1997. [Return to Text]

4Source - Credit Card News-Credit Card Issuer’s Guide Annual Statistical Abstract for l997. Receivables are only those of Visa, MasterCard, American Express and Discover, and are on a calendar-year basis. [Return to Text]

5Source - Administrative Office of U.S. Courts; 1997 Bankruptcy Yearbook & Almanac. [Return to Text]

Journal Date: 
Sunday, February 1, 1998

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