September 1, 2008
Over-Spending is Cause for Personal Bankruptcy According to New Study
Well, I'm glad we cleared that up! Professor Ning Zhu, Professor at University of California, Davis, has some great statistics which show what I have been saying for years: over-spending by consumers is the biggest cause for consumer bankruptcies, not medical problems, divorce and unemployment. The article is here. According to Zhu, the overspending makes the consumer "more susceptible to adverse events" but the spender knows that he can file bankruptcy and only partially bear the cost of the overspending.
Having agreed with him on the cause for filing, I still have no problem with the consumer bankruptcy rules and ease of bankruptcy. The credit card companies extend credit every day to people with marginal ability to repay and now want rules preventing bankruptcy so that the telephone collectors won't be impeded from bludgeoning these people into paying the credit card before anything else.
Professor Zhu writes, "In terms of policy implication, our findings indicate that by imposing greater costs, the more stringent requirements for filing in the new law may deter some households from over-consumption." I disagree with that comment completely. With credit card issuers bombarding consumers with easy credit and ridiculously high interest rates, the only thing "greater costs" accomplishes is more and more people "going underground" after running their credit cards to unacceptable limits. Without the bankruptcy fresh start, these consumers will work "under the table," cash their paychecks so there is no bank account to seize or simply work less or not at all so there is no paycheck to seize. The primary accomplishment of bankruptcy is it stops that phone from ringing - the collector gorillas - and the consumer can rejoin society.
Zhu points out that credit card debt equals almost a full year of income for "the bankrupt households" he studied. That means something like a third of their pre-tax income goes to pay the interest alone. How can credit card issuers extend that kind of debt to those kinds of consumers? And now they want Congress to simply prevent the bankruptcy filing! My vote is to rescind the 2005 Amendments.
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I totally agree. I have been teaching and writing about consumer credit education for over ten years. We have a dilemma. Who really is at fault, when a young couple get a $300.00 credit card,they don't realize the minute they call the #800 number and activate it, they really only have less than $150.00 available. They don't realize it and "wham" first month over the limit fee. They get mad and decide to cut the card up. They don't realize that now the "time bomb" is ticking. Every month there is another $39 + $39 tacked on. At the end of the year go figure out how much they owe at 36%? It is almost $2,000. So, do you think that the "feeding sharks" on Wall St care?
Posted by: Regis Sauger | Jul 2, 2009 8:20:24 AM
I would also like to comment on un-secured debt that has legally been extinguished by law. This debt is purchased for .03 on the dollar by Attorneys representing investors. They then send the poor homeowner a letter, introducing themselves(or company) as the next best thing to "sliced bread". They tell them, "we want to help you with your problem" We are willing to accept a 50% discount IF you pay now. So, when they bought that $5,000 debt for $150.00 and get the un-educated consumer to pay them $ 2,500 where is the "integrity" of these "bottom feeders". Education again needed.
Posted by: Regis Sauger | Jul 2, 2009 8:25:08 AM