Credit offers pile up for bankruptcy filers
By Timothy Egan: The New York Times
December 11, 2005

  TACOMA — As one of more than 2 million Americans who rushed to court this year to file for bankruptcy before a tough new law took effect Oct. 17, Laura Fogle is glad for her chance at a fresh start. A nurse and single mother of two, she blames her use of credit cards after cancer surgery for her fall into deep debt.
  Fogle is broke, and she may not seem to be the kind of person to whom banks would want to offer credit cards. But she said she had no sooner filed for bankruptcy and sworn off plastic than she was hit with a flurry of solicitations from major banks.
  "Every day, I get at least two or three new credit-card offers — Citibank, MasterCard, you name it — they want to give me a credit card, at pretty high interest rates," said Fogle, 41, of Tacoma.
  If it seems odd to Fogle that banks would want to lend money to the newly bankrupt, it is no mystery to the financial community, which charges some of the highest interest rates to these newly available customers.
  Under the new law, which the banking industry spent more than $100 million lobbying for, they may be even more attractive because it makes it harder for them to escape new credit-card debt, extending to eight years from six the time before they can liquidate their debts through bankruptcy again.
  "The theory is that people who have just declared bankruptcy are a good credit risk because their old debts are clean and now they won't be able to get a new discharge for eight years," said John D. Penn, president of the American Bankruptcy Institute, a nonprofit clearinghouse for information on the subject.
  Credit-card companies have long solicited bankrupt people, on a calculated risk that income from the higher interest rates and late fees paid by those who are trying to get their credit back will outweigh the losses from those who fail to make payments altogether.
  But the new law makes for an even better gamble for lenders, consumer groups said. It requires many of those who do go back into bankruptcy to pay previous credit-card bills that may have been excused under the old law.
  Bankers defend the practice of soliciting the newly bankrupt, saying it gives those customers a chance to build new credit histories.
  "The people coming out of bankruptcy need an opportunity to get back on their feet," said Laura Fisher, a spokeswoman for the American Bankers Association (ABA), the industry's largest trade group. "If you take away the opportunity to get credit, it's like taking away the want ads from a job-seeker."
  But consumer groups said the new law has put millions of Americans at risk of being in a continuous debt loop through their credit cards. And while the banks have taken a short-term financial hit because of the new filings — leaving banks holding the bills — they will benefit in the long run because the new law makes it much easier to make money on people who live near the edge every month on their credit cards, some consumer groups say.

Model built around debt
  Credit cards are the most profitable part of the banking industry, with late fees and high interest charges helping make them so. Last year, more than 5 billion solicitations for new cards were sent, nearly double the number from eight years ago.
  "The whole business model of the credit-card industry is built around outstanding debt," said Ellen Schloemer, a researcher at the Center for Responsible Lending, a nonprofit group that tracks lower-middle-class financial issues. "This is the only industry that calls people deadbeats when they pay all their bills every month."
  As of the end of October, 2,010,567 people had filed for bankruptcy protection this year, a modern record, federal bankruptcy court officials say. In a little more than two weeks of October, more than 600,000 people filed petitions. The debtors were rushing to beat the Oct. 17 deadline when the most sweeping changes in bankruptcy law in 25 years took effect.
  Most of the newly bankrupt filed under Chapter 7, which allows them to expunge many unsecured debts. The new law makes it much more difficult to erase debt; it increases the cost of filing and adds requirements such as credit counseling.
  The banking industry worked in Congress for nearly 10 years to pass the law, and critics said it gave bankers everything they wanted to increase profits from people prone to debt. Bankers said the law makes it harder for people to abuse the system.
  Opponents, including a group of bankruptcy-law professors, said the changes gave the banking industry too much of an advantage.
  "In our view, the fundamental change over the last 10 years has been the way that credit is marketed to consumers," the professors wrote in a letter to the Senate this year. "Credit-card lenders have become more aggressive in marketing their products, and a large, profitable market has emerged in sub-prime lending. Increased risk is part of the business model."

Seeking a fresh start
  Fogle would seem to be a perfect candidate for long-term debt to credit cards. Though she works regularly as a nurse at Good Samaritan Hospital in Puyallup, earning $16 an hour, and has health insurance, she said a health emergency pushed her into debt. Last year, she needed surgery for uterine cancer, which caused her to miss work and income. Credit cards made up the difference, and soon she was $15,000 in debt.
  She filed for protection in late August, and her debts are now removed. "My plan is to lay off credit cards until I can really afford them," she said. "But it's tempting. I would like to have one in case of emergency."
  The credit-card offers inform Fogle she is preapproved, but at a higher interest rate: 23 percent or more, which is typical for offers to the newly bankrupt.
  "It's obvious what they're trying to do here — start people off with a fresh credit card at a much higher rate than before," she said.
  Nearly 60 percent of all credit-card holders, about 85 million Americans, carry a monthly balance, that is, they do not pay off the entire debt at once, according to the ABA.
  The average debt among those with a monthly balance is $9,000, said the Consumer Federation of America in a recent report. Paying just the monthly minimum — usually 2 percent of the balance — on $9,000, it would take 42 years to pay off the debt, at a typical 18 percent interest rate, the consumer group calculated.

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