Aug. 14, 2007
Law Professor: Bankruptcy Not A Black Mark To Credit Card Companies
Contrary to conventional wisdom, filing for bankruptcy is not a black mark that will make it all but impossible to obtain future credit, according to new research by a University of Iowa law professor.
In fact, the study by Katie Porter shows that people who have recently declared Chapter 7 bankruptcy are flooded with pre-screened credit card offers. They receive an average of 14 solicitations a month in the first year after bankruptcy, more than double the average of six solicitations that most people receive.
"Creditors repeatedly solicit debtors to borrow after they've filed for bankruptcy. Often even the creditors whose debts were discharged in bankruptcy are willing to lend again to the same families," said Porter, an expert in bankruptcy and credit law. "Distressed borrowers are a highly lucrative market for credit providers, and some lenders rely on that distress for their profitability."
But at the same time, she said those same people who get dozens of credit card offers report they've had a harder time obtaining secured financing loans, such as home mortgages. She said that such a difference in credit accessibility has important public policy implications.
"We know that purchasing a home can be an important wealth building strategy, but after bankruptcy this seems to be the most difficult credit transaction to complete," said Porter. "On the other hand, my research suggests that credit cards, which are widely available after bankruptcy, may stimulate financial distress for consumers."
The study analyzed data from 359 families who filed for bankruptcy protection in the first half of 2001. The data was collected from questionnaires, bankruptcy court records, and telephone interviews that were compiled as part of the 2001 Consumer Bankruptcy Project, a collaborative research study by several professors, including Porter.
Porter said the bankruptcy debtors reported that, rather than being seen as risks too great to be given credit, 96 percent of them were offered credit cards and pre-approved credit in the first year after their filing. Frequently, she found that credit card companies used the person's bankruptcy as a marketing tool, telling the person that a new card can help re-build a credit history and help them get back on their feet financially.
She said credit card companies target people who have declared bankruptcy because they tend to be good sources of revenue. Most filers were driven to bankruptcy in part because they amassed a large amount of credit card debt, indicating to the companies that the people are used to having credit cards.
The kinds of cards offered to bankrupt persons also tend to be loaded with fees and service charges, profit-generators that car loans and mortgages don't feature to the same degree.
Unfortunately, Porter said that most people who file for bankruptcy -- and most Americans in general -- don't know that tools are available to help them more effectively manage their finances.
For instance, she said federal law requires credit card companies to stop sending solicitations to people who request that they be stopped. To do so, consumers need only call 1-888-5-OPTOUT, a toll-free number that the credit bureaus operate to comply with the law.
Bankruptcy law requires that debtors must complete a financial education course before their debts can be discharged in bankruptcy. Porter said the curriculum for that course should reflect the real financial dilemmas that will face people after bankruptcy, including the widespread marketing of credit.
"Too often, the message about debt is something simplistic, like 'credit card debt is bad,' which most of these people already know by the time they file for bankruptcy," said Porter. Of the people in her research who were offered credit, only 25 percent opened an account during their first year after bankruptcy.
"What the educational program should explain is what's going to happen to them after they've filed bankruptcy in terms of aggressive credit marketing, how to identify a card or loan with the lowest interest rate and least expensive fees, how to stop pre-screened credit offers; things like that."
Porter recommends that bankruptcy debtors avoid taking the first offers that they get and look for the best deal that they can find.
"We don't want to stop these families from ever borrowing again," Porter said. "We may want them to buy a house, for instance. If they have a good idea for a small business, we should encourage them to take out a loan to start the business. We shouldn't simply tell people who file bankruptcy that debt is only a bad thing and stay away from it; that's not helpful. What we should have is an educational program that focuses on how to manage debt responsibly and how to understand the likelihood that debt can worsen your financial situation."
Porter said the results of her research are not news to most people within the financial services profession, who know about creditors' marketing strategies and practices involving bankrupt customers. However, her study is the first to collect reliable data that shows how extensive the strategy is and how it affects people who have declared bankruptcy.
A complete copy of the study, "Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending," is available online at http://ssrn.com/abstract=1004276.
STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Suite 371, Iowa City, Iowa 52242-2500.
MEDIA CONTACT: Tom Snee, 319-384-0010, firstname.lastname@example.org.