13 Jan Credit Cards and Bankruptcy
Foreclosures have been getting a lot of media attention lately, but credit card debt probably accounts for more bankruptcies than foreclosures. And a lot of people who fall behind on mortgage payments and end up in foreclosure do so trying to juggle credit card debt as well, so it’s probably responsible for a fair number of those as well. Credit cards are like crack–addictive, hard to handle, and a hard habit to break. It’s not an original thought. My colleague and friend, Russ DeMott, has said for years that credit card issuers are the drug pushers of the financial world.
For years, credit card issuers have used extremely sophisticated marketing tactics to woo customers and promote the use of credit cards, often in completely irresponsible ways, at the same time that their collection departments maximize fees, unilaterally raise rates, and, in short, do all those things that cause customers to default. Often at the same time. Although it has some age on it, the PBS show Frontline did a report that outlines some of the history of the industry, as well as some of the things you should know about credit cards, but probably don’t. In fact, some of those tactics were so abusive that Congress passed the Credit Card Accountability, Responsibility and Disclosure Act (sometimes referred to as the CARD Act). What the act does not do, as some scammers try to maintain, is give anyone the “right” to avoid or settle all or part of their credit card debt. That is called “bankruptcy.”
I often hear from my clients very real and heartfelt concern that they are somehow treating the credit card companies unfairly by filing bankruptcy. I point out to them how, in many cases, the card issuers knew that they were overextended when they offered new credit, and how much they have paid over the years in interest and fees. And I point out how aggressively the credit card companies market their cards. In many cases my clients talk about trying to persuade credit card lenders to offer any lower interest rate or payment terms, while the account is being paid, but offer generous settlement terms after the account is in default and headed toward bankruptcy. In other words, as long as you’re paying the minimum payments, they have no interest in working with you, but once they’ve trashed your credit, they’ll settle for pennies on the dollar.
I recently added another story to my repertoire, to demonstrate the essential irrationality of credit card marketing, which also explains a lot about credit card collection. In the last several weeks I received in the mail an offer for a pre-approved credit card, from a very large bank. The offer included a period of more than a year with no interest. Only problem was that the offer was directed to a person who doesn’t exist. The address on the offer was my business address, but my name appeared nowhere on the offer. Instead, the last name on the offer was that of one of my clients, and the first name was that of the client’s bankruptcy trustee. How the bank happened to put that together is a mystery to me, but is a perfect demonstration of the essential irrationality of their marketing efforts. And no, I did not send it back. I will admit to curiosity about what would happen, but common sense, and a sense of decency, prevailed. I wish I could credit the credit card issuers with the same.
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