October 4, 2007
Great Insight on Credit Card Lending to "Bankrupts"
Professor Katie Porter has a great article on the practices of the credit card industry in lending to persons after they have filed bankruptcy. Bankrupt Profits: The Credit Industry’s Business Model For Postbankruptcy Lending, Katherine Porter, College of Law, University of Iowa. Using significant empirical data, she establishes that the credit card industry tells Congress that debtors are low-lifes who run up their credit card on frivolities intending to file bankruptcy to avoid repayment. In reality, the industry views debtors as "new meat," a new source of profit.
"This Article’s key finding is that creditors repeatedly solicit debtors to borrow after bankruptcy. Families receive dozens of offers for new credit in each month immediately after their bankruptcy discharge. Some offers specifically target these families based on their recent financial problems, using bankruptcy as an advertising lure."
Her findings are based on a "core sample" of "1,250 consumer bankruptcy cases, consisting of 780 Chapter 7 bankruptcies and 470 Chapter 13 bankruptcies." She analyzed the cases at the outset and did telephone interviews one and three years later.
"Credit solicitation of recent bankruptcy debtors is rampant. Nearly all debtors stated that they had received offers for credit in the first months following their bankruptcy. One year postbankruptcy, these families reported that creditors sent them an average of more than fourteen credit offers per month."
Her findings are that 25% of the debtors had obtained new credit within one year of the filing.
"Two paradoxes emerge. Debtors report more difficulty in obtaining secured loans than unsecured loans. Also, debtors who chose Chapter 13 (repayment) bankruptcy instead of Chapter 7 (liquidation) bankruptcy have fewer opportunities to borrow. Rather than identifying them to creditors as a 'responsible' borrower, repaying a portion of their past debts actually hinders a family’s access to future credit. On the whole, the credit industry treats former Chapter 7 bankruptcy debtors as valuable customers, seeking to profit by loading these families with new debt immediately after bankruptcy."
"Chapter 13 families are significantly less likely to receive credit offers than Chapter 7 families. The reported rate for Chapter 13 families is significantly lower than the fraction of Chapter 7 debtors (96.1 percent) who receive credit offers after filing bankruptcy. At least in the short-term, Chapter 13 seems to be a modest deterrent to the credit industry’s efforts to turn bankrupt families into customers."
She concludes, "lenders’ intense solicitation of postbankruptcy families is consistent with an understanding of the consumer bankruptcy system as a refuge for decent, honest families reacting to adverse events such as job loss or illness."
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