Why Consumers Are Paying Credit Card Debts Before Their HELOCs
By Chip Parker, Jacksonville Bankruptcy Attorney on Jul 4, 2007 in Consumer Protection, Debt Collector Abuses, Florida, Foreclosure Issues, General Bankruptcy Information, Personal Finance
In today’s (July 4, 2007) paper, the Associated Press reports that late payments are up for equity lines of credit but down for credit card payments. This news seems to indicate a trend that more people are opting to pay unsecured credit cards than loans secured by their homes, despite the fact that most people know they should pay their mortgage before they pay their credit cards.
There are two primary reasons for this recent phenomenon: Credit card collectors tend to be very aggressive, and more and more people are getting crushed by the current subprime lending debacle.
First of all, anyone past due on credit card debts knows that collection agencies will aggressively browbeat in an attempt to squeeze pennies out of debtors. People will pay an abusive collector money at the expense of keeping secured debt, like a home equity line of credit, current. Collection agencies are governed by the Federal Fair Debt Collection Practices Act, and collectors frequently engage in activity prohibited by the law, even posing as law enforcement or attorneys. More increasingly, such agencies have come under fire from states’ Attorney Generals’ offices, most recently Florida.
The other major reason for the seemingly illogical behavior of paying unsecured debts before home equity lines of credit is that many Americans have given up on saving their homes. Years ago, people would get behind in their mortgage payments only because some bad and/or unexpected happened in their lives: loss of a job, illness, injury, divorce, etc. Now, in the wake of a record number of subprime rate “resets”, marginally-qualified homeowners find that, even though their economic circumstances are the same as when they purchased their home, they can no longer afford their mortgage payments because their interest rates have skyrocketed.
The foolish subprime lenders were banking on these strapped homeowners to refinance their mortgages every couple of years to avoid these monstrous mortgage increases. This is the subprime lending scam. What lenders didn’t count on was a collapsing real estate market and tightening of lending requirements. The result as been that these borrowers can no longer refinance, so they just give up. This is the reason that, even though home foreclosures are at an all-time high, the number of Chapter 13 bankruptcies has not risen to nearly the same degree.
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