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RECORD SETTING BANKRUPTCY FILINGS
NEW YORK (12/19/05)—A record setting 2,010,567 people have filed for bankruptcy this year to beat changes in the law that went into effect in October (The New York Times Dec. 11).
In the two weeks before Oct. 17—the start of bankruptcy reform that made filings more difficult—more than 600,000 people filed for protection under the old law. Most of the bankruptcy filings came under Chapter 7 of the code that allowed debtors to rid themselves of old, unsecured debt. The new bankruptcy code increases the cost of filing, adds financial counseling requirements, and makes it harder for debtors to escape paying their bills.
Many blame easy credit, particularly credit card debt, for much of the bankruptcy problem. Yet more than five billion credit-card solicitations filled the mailboxes of consumers last year, more than double the number of solicitations just eight years ago. And newly bankrupt consumers are still getting credit-card solicitations—sometimes at the rate of one or two offers a day.
Some consumer groups—like the Center for Responsible Lending in Durham, N.C.—are up in arms about those solicitations going to newly declared bankrupts.
Bankers contend that these individuals need credit just like anyone else and they are getting a new chance to build credit. While many have not demonstrated the ability to manage easy credit, their debt plate has been wiped clean so they are again a good lending risk.
It looks like a vicious cycle. Nearly 60% of all credit-card debtors (85 million people) carry a monthly balance. The Consumer Federation of America says the average debt among those with a monthly balance is more than $9,000. Paying the minimum on that debt—about 2% of the outstanding balance—would take consumers 42 years to pay off the debt at an interest rate of 18%. Recently, the minimum payment on many credit card lines of credit has increased to 4% of the outstanding balance.
While bankruptcy filings have increased more than 17% over the past eight years, consumer groups point out that credit-card issuers have seen profits increase 163% to $30.2 billion. Americans owe $800 billion in credit card debt, more than triple the amount since 1989 and a 31% increase from five years ago, according to the Center for Responsible Lending and Demos, a research group in New York. Their study found one-third of low- and middle-income consumers using credit cards for basic living expenses. Those with the worst credit-card debt were people between the ages of 50 to 64.
Tips for consumers with credit card debt:
If you can't pay the bill in full, try to consistently pay more than the minimum.
If possible, don't add new credit-card debt while you pay off the current balance.
Pay debts with the highest interest rate first, while making at least minimum payments on all other debts.
Don't ignore creditors; call to work out a repayment plan.
Beware credit repair clinics.
Reduce unwanted credit card solicitations (optoutprescreen.com or call 888-5-opt-out).
Build a savings cushion for future emergencies. Pay yourself first.
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