Credit Card Delinquencies Up - What about Bankruptcy Reform?
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Credit Card Delinquencies Up - But What about Bankruptcy Reform?

I just can't understand it.

Bankruptcy reform was supposed to solve all of the credit industry's problems, wasn't it?

It would rid the world of those evil, calculating consumers who took out credit cards in anticipation of someday discharging their debts in bankruptcy, milked them for everything they could buy, and then said goodbye in bankruptcy with a smile and a wave.

As we've mentioned before, this didn't work out quite the way the credit industry intended.

You could almost feel sorry for them-they dedicated nearly a decade (and we won't even talk about how much money) to pushing through this legislation that was supposed to make it difficult for people filing bankruptcy because then they'd collect more money.

It looks so rational on its surface, and yet they overlooked one absolutely critical point: Access (or lack of access) to the bankruptcy process doesn't affect a person's ability to pay.

It's really that simple. Now, nearly a year and a half after the "new bankruptcy law" took effect, the credit industry is discovering that it's not really working out for them.

In the beginning, of course, they put on a brave face and talked about how it was too soon to tell, but it's not anymore.

Bankruptcy filings are rapidly climbing back to pre-reform rates, so it isn't likely that things are going to get any better for the credit card industry. At least, not as a result of bankruptcy reform.

In February, 6.7% of credit card receivables became past due. That's just fresh delinquencies, mind you, not those that were already 30 days past due going into February. Net credit charge-offs were at 4%.

And why? Why isn't bankruptcy reform inspiring people to keep those payments up to date? It's that little secret someone should have shared with the credit industry before they went so far down this road: they don't have the money.

Perhaps, if the credit industry really wants to cut its losses, it should consider some different measures. For instance, credit card companies could:

  • Stop targeting college students they know to have no source of income
  • Stop offering credit cards to people with terrible credit ratings and then loading those credit cards up with front-end fees such that their customers are paying for the privilege of holding credit cards they can't use
  • Stop playing games with payment processing and adding meaningless fees that make it difficult or impossible for the people who can barely make their payments but are making an honest effort

Congress may force some of those measures. A recent GAO study determined that credit card disclosures needed significant improvement, and the final rules on that effort have yet to be seen.

But regardless of those (or other) reforms, the underlying problem will remain unless and until the credit card industry understands that if they consciously assist consumers in-and in some cases mislead them into-accumulating debt that it is beyond their means to pay, they're not going to end up paying it.

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