Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
A recent law review article, Bankrupt Profits: The Credit Industry’s Business Model for Postbankruptcy Lending, "examines what the credit industry’s behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy." This article looks at the contentious issue of what causes debtors to file bankruptcy by analyzing "original empirical data from the first-ever detailed longitudinal study of bankrupt families," the Consumer Bankruptcy Project. The phase of the study pertinent to this article involved a dozen interdisciplinary researchers and more than a thousand Chapter 7 and Chapter 13 debtors from five federal judicial districts. Here are the most important aspects of this lengthy but fascinating article.
Background
In arguments promoting BAPCPA, the credit industry, members of Congress, and President Bush focused on a perceived abundance of people who irresponsibly overborrow and then lack the moral conviction to repay their debts. Thus, according to this line of argument, these people abuse the credit system to the detriment of creditors and other responsible borrowers. Therefore the intent of many of the new law's provisions was to make bankruptcy relief more restricted, more expensive and more burdensome for potential filers, thereby reducing its availability. Accordingly through this legislation, intentionally and unintentionally irresponsible consumers were being encouraged to make better moral and sensible financial decisions.
But a competing argument
posits that most families fail to pay their debts because of an external financial shock—not because they lack moral fiber or borrowed with no intention of repaying. This view focuses on macroeconomic and social trends, rather than individual consumers’ decisions, to understand the rise in bankruptcy filings. Advocates of the adverse-events model note that America offers families a relatively weak, and declining, social safety net to help them cope with adverse financial events. The expansion of consumer credit in recent decades has left families more highly leveraged and less able to weather financial shocks.The 1st of these two arguments focuses on debtors' behaviors and decisions in attempting to reduce bankruptcy filings; the 2nd argument leads to questions about reforming "creditors' lending practices and the scope of social programs" to reduce filings. The lengthy legislative process that eventually led to BAPCPA fixated on the former, with very little attention given to creditors' business practices and its consequences on bankruptcy filings. All the effort was on changing consumers' behavior and virtually none on how bankruptcy or other laws could influence creditors' behavior.
Study Findings
The key finding is that contrary to the credit industry's public arguments that consumers who file bankruptcies are irresponsible and immoral, many subsets of the industry repeatedly solicit debtors to borrow after their bankruptcies. If creditors would believe their own public arguments, they would avoid soliciting to these consumers after they file bankruptcy, but the evidence is far to the contrary.
During the one year after bankruptcy, 96.1% of the debtors reported receiving credit solicitations. On average they received more than 14 solicitations per month.
Post-bankruptcy debtors are specifically targeted, with nearly a third of debtors reporting receiving solicitations from the same creditors who were creditors in their bankruptcies, and nearly 90% reporting receiving solicitations which specifically referred to their bankruptcy filing.
Note the following from the Federal Reserve's Report on Soliciting and Extending Credit (2006):
Lender ratings of potential borrowers have become increasingly sophisticated and automated over the past decade. Lenders have extensive information on borrowers available from credit reporting agencies and from proprietary databases. This information is combined with new quantitative modeling techniques—which help lenders rank prospective borrowers on the basis of historical information about borrowers with similar quantifiable characteristics—to guide the determination of which prospective borrowers in each portfolio will be extended credit and the pricing of that credit.Former bankruptcy debtors, especially those who filed Chapter 7, are high-profit customers because they often continue to have financial difficulties after their bankruptcies and therefore generate a higher proportion of late and other types of fees, and to use higher interest cash advances.
Contrary to expectations that post-bankruptcy creditors would want collateral to protect themselves against conniving and foolish debtors, unsecured credit is more available than secured credit.
The Bottom Line
Many sectors of the credit industry aggressively and purposely solicit to post-bankruptcy consumers. This behavior reveals that these creditors believe the "adverse-events" argument--that most consumers who file bankruptcy are honest and responsible. Therefore to reduce bankruptcy filings, more attention needs to be paid to reforming creditors' lending practices.
Very interestingly and not coincidentally, in the few months since this law review article was written the worsening economy has indeed focused public attention particularly on the practices of sub-prime mortgage creditors and the dizzyingly elaborate system built up in the financial world to support those practices It is now painfully obvious that instead of scapegoating consumers filing bankruptcy, infinitely more public, regulatory, and legislative attention should have been paid to the creditor side of the table.
by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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