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Keeping up with the Jones'

Looks like those desperately mortgaging their future to keep up with the Jones' will find it harder to be absolved of their responsibility to pay back their creditors because of a new bill that's expected be made into law:

"A key feature of the bankruptcy law is that it aims to compel more debtors to file under Chapter 13 of the federal bankruptcy law, which requires filers to repay at least some of their unsecured debts with regular payments over five years. Currently, more than two-thirds of bankruptcy filers across the country use Chapter 7, which wipes out all unsecured debt and allows consumers to start fresh." - from The Wall Street Journal.

or read about it at Reuters.com, or at Foxnews.com, or at CNN.com.

To understand better the difference between the different chapters of bankruptcy filings, go to BankruptcyLawFirms.com .

To view statistics on bankruptcies in recent years, please refer to USCourts.gov.

I guess this is just another reason to follow President Hinckley's counsel:

"It is so with boats and other fancy toys. When one family in the neighborhood gets a boat, others think they need one. To satisfy our desires, we go into debt, dissipate our resources in the payment of high interest, and become as slaves working to pay it off. Please do not misunderstand me. I repeat that I wish everyone might have some of the good things of life, but I hope our desire will not come of covetousness, which is an evil and gnawing disease. I think of many of our younger single and married members; I hope that you will be modest in your physical wants. You do not need everything that you might wish. And the very struggle of your younger years will bring a sweetness and security to your later life."

Credit Card Debt

Of course we all agree that debt is bad, and that people should avoid it. However, this new law will do nothing to induce people to lower their debt. To the contrary, its most obvious affect will be to encourage credit card companies to extend more credit, to those who are the worst credit risks, with even more deceptive fine print, and all with less fear of incurring default on their loans.

Tellingly, this law is neither a darling of the right or the left. Its pretty much getting panned by everyone - right and left - who isn't affiliated with the credit card companies. (See Instapundit for the details.)

Frankly, I think those in Congress who are pushing this through are revealing themselves to be nothing more than bought-and-sold property of Big Business. That goes double for the Republicans who worked so hard to defeat a badly needed national minimum wage hike last week.

true......

This is obviously a bill to appease the interests of creditors. It is to help them recollect the money that they loan out unsecured. It is, afterall, their money. Whose responsibility is it to monitor and control peoples' financial decisions? Should there be a provision included that tells people when they can and cannot apply for credit?

If you disagree with this legislation, do you agree with the principle of Chapter 7 bankruptcies? Should consumers be able to, in large part, walk away from the debts that they have accumulated? All this bill is saying is that those who borrow money, will fulfil their responsibility of paying it back.

Financial institutions are businesses just like any other industry. Just because they solicit you for credit, doesn't mean you have to accept it - just like you don't have to buy any of the products advertised by any other business. If consumers decide to over-extend themselves, why should we blame it on the company that lent them the money? This sounds like the same logic that was used when McDonald's was sued because their consumers were getting fat. Of course fast food is going to make you fat! Of course you need to pay back your creditors when you incur debt!

Bankruptcy is an interesting

Bankruptcy is an interesting topic to me, especially since Utah has consistently held the honors of highest bankruptcy filings per capita AND per household in the states.

I just wrote a paper on it for a finance class that explored some of the causes behind the filings here. As a result, I agree--laws are less likely to change anything than changing behavior and attitude towards spending will. If you want to check it out (it's a quick read with some good insights from a former Wells Fargo VP), I posted it here: http://bcrockett.blogspot.com/2005/03/bankruptcy-mormons-and-money_04.html

Yesterday's News

On yesterday's news it said most bankruptcy are due to medical bills. Only 10% are people intentionally running up a high debt and then declaring bankruptcy

Where is the "responsibility" of lending companies?

I wholeheartedly agree that individuals need to demonstrate more responsibility re: their borrowing practices.

However, I find the actions of the credit card companies, etc. very disturbing. My question in this whole debate is this: where is the "responsibility" of the lending institutions that rammed this bill through Congress?

Lending institutions knew the bankruptcy rules when they lent billions of dollars to people with shaky credit. Well aware of these rules they lent the money anyway.

Now those people can't/won't pay.

So what is a powerful group like the banks to do? Get Congress to change the rules of course!

So where is their responsibility?

Again, it's all about responsibility

How much did they really spend to push it through anyway? Was it 'millions'? Where did you find those numbers?

Check out OpenSecrets, which compiles data regarding money in politics. Commercial Banks and Finance/Credit Companies give heavily to both parties, but favor the GOP. And this data doesn't include the millions that they spend on lobbyists every year.

All lending institutions use what's called risk-based pricing, which means, the higher the perceived risk to the bank, the higher the interest rate they charge. This is to mitigate the risk.

Exactly. This is how it should be. I don't know many folks who have problems with this market based approach, as long as consumers know up front what the associated rates and fees are.

Now do banks just lend money out to every irresponsible person out there just so they can charge higher interest rates?

If I follow your complete argument, the answer to your question here is YES.

You seem to argue (but correct me if I'm wrong):

    People who declare bankruptcy are financially irresponsible.
    It's not unfair to ask these folks to show some responsibility and repay what they've borrowed.
    Hence, the bankruptcy reform is ok since it enforces greater responsibility of the consumer.

Now, we know that millions of people are declaring bankruptcy. And if we accept your premise that people who declare bankruptcy are generally financially irresponsible, then YES, in recent years banks have become more and more willing to "just lend money out to every irresponsible person out there."

And this goes to the heart of my argument against the bill. Lending institutions have made completely irresponsible decisions to lend money to a lot of similarly irresponsible people (who are now declaring bankruptcy). The lending institutions realize that they made poor decisions, but don't want to accept the consequences of their lending decisions. So, instead of taking responsibility, the lending insitutions have spent millions of dollars to change the rules.

Bocajuniors

You seem like a rational thinker who keeps his discussion within the realm of intelligence. Do you have any other posts/threads/websites I could look into?

bankruptcy bill finds its way to the President's desk....

From TheWallStreetJournal:

Bankruptcy Overhaul Bill

Clears House; Bush to Sign

Associated Press

April 14, 2005 4:14 p.m.

WASHINGTON -- Tens of thousands of people who want to wipe out their debts in bankruptcy court will have to work out repayment plans instead under legislation Congress approved Thursday.

A 302-126 vote by the House sent the legislation to President Bush, who is eager to sign it, the biggest rewrite of the bankruptcy code in a quarter-century. It marks the second major change in law to benefit business since Republicans increased their House and Senate majorities in last fall's elections.

Thomas S. Monson

In Tuesday, May 17th's edition of the WallStreet Journal, they ran an article as part of a series on debt management, called Lagging Behind the Wealthy,Many Use Debt to Catch Up, by Bob Davis, in which they quoted Thomas S. Monson from his address in last April's conference.

In a conservative, largely Mormon state that favored George Bush over John Kerry, 72% to 26%, the surge in bankruptcies has led to soul-searching. At a conference of Mormon officials in April, Thomas Monson, the church's second-ranking leader, said he was "appalled" at advertising for home-equity loans that is "designed to tempt us to borrow more in order to have more." He repeated the words a Mormon elder spoke during the Depression: "Interest never sleeps nor sickens nor dies.... Once in debt, interest is your companion every minute of the day and night."

There was also a quote from a SLC mortgage broker about the "Nephite syndrome" - I just thought it was interesting that this was all on the front page of the WSJ.

Robert Head, a Utah mortgage broker, reflects the state's ambivalence toward debt. He specializes in interest-only loans, which sometimes can leave people in over their heads. But at the same time he complains that too many Utahns suffer from what he calls "the Nephite syndrome," referring to a clan described in the Book of Mormon that was reduced to poverty through greed. Mr. Head says he also helps solve debt problems by restructuring high-interest loans.

Good article....

I liked what you wrote in your article... I agree people need to change their perspective on how they handle their finances. I just wanted to clear one thing up in the comment posted by Jake - he said that most personal bankruptcy filings are Chapter 13. That is false. If you check the statistics at uscourts.gov you'll see that there are over twice as many Chapter 7 personal filings as Chapter 13.

More on Bankruptcy

Brad,
First, let me say that I appreciate your points, and I have some sympathy for them. It is certainly true that people should be responsible to repay the debt they choose to accrue.

Here is my position:

I believe - and I'm sure you agree - that it should be painful to declare bankruptcy. This protects the creditor - as it should. In my opinion, our current system usually does this well enough already.

However, I also believe strongly that there must be an expectation that creditors are responsible. For the good of all, they should not be allowed to charge extravagant rates, or to extend credit to the uncreditworthy, thereby extending general indebtedness. In my opinion, the current system does not prevent this kind of abuse as well as it should.

A quick anecdote: I got an offer for a credit card a couple of days ago. The interest rate was 12.99%, but the fine print stated that the moment the cardholder was late for one month, that rate would automatically rise to 29.99%! For the good of our country, I do not believe this should be legal.

In summary:
This proposed law, as I see it, is precisely backwards. Rather than protecting the credit card companies, thereby allowing them to extend more (and riskier) credit, we should be passing laws to protect the consumer from loose and ultimately destructive credit schemes.

Thank you for the pleasant discussion, and for bringing up this important issue.

Thanks

Very thought-provoking. Thanks for the link.

source?

Could you please provide a source, or a more factual post? Information like that could really add to the discussion, but it needs to be substantiated.......

one thing first....

Before we can develop a meaningful discussion about the responsibilities of lending institution, I need a few things defined. What exactly are the 'actions of the credit card companies' that you find 'very disturbing'? Also - what standard do you use when you define people as having 'shaky credit', and what standard does the financial services industry use?

Thanks, BocaJuniors

Thank you for the numbers and the sources. That always adds to a legitimate discussion.

Along the lines of risk-based pricing - you agreed with me that this is a logical way of doing business. Your exact words were

Exactly. This is how it should be. I don't know many folks who have problems with this market based approach, as long as consumers know up front what the associated rates and fees are.

That is the purpose of the disclosures banks are required to give you when you apply for credit - the terms and conditions of the loan. If banks are not giving you these disclosures, then you have a case, but they are supposed to. Now of course no one is going to read every disclosure that comes to them along with the credit card offers people receive daily through the mail. But I don't think it's too much to ask for consumers to read through them for the specific credit that they are actually applying for. Again, the responsibility of the lending institutions is to provide the information - the responsibility of the consumer is to read the information.

There are no statistics to specifically separate the financially respnsible from the irresponsible. I do believe that there are many cases of bankruptcies filed due to circumstances beyond the control of those individuals. But it is my personal belief, and based off of any experience I have had, that the majority of bankruptcy filings come as a result of financial irresponsibility - or people living beyond their means.

now, you seem to be implying that lending institutions are lending money out to everyone - regardless of their credit score, and that is simply not true. You said....

Now, we know that millions of people are declaring bankruptcy. And if we accept your premise that people who declare bankruptcy are generally financially irresponsible, then YES, in recent years banks have become more and more willing to "just lend money out to every irresponsible person out there."

This seems to imply (and now you can correct me if I'm wrong) that banks are lending money out to those that have declared bankruptcy.

As I explained earlier, banks use different systems for determining their willingness to extend credit to high-risk individuals. Most of the 'major credit card companies' which I assume is the focus of this thread, are rated by Moody's rating system. And in order for a financial institution to maintain their own good rating, they do not extend credit to those with a particularly low credit score (the U.S. average is around 680, I believe. Anything below 600 is probably what I would consider a low credit score, but that varies by institution), or to anyone who has had a bankruptcy in the last ten years - and then only after they have shown financial responsibility (raised their credit score back up). So I do not believe that these financial institutions are lending credit to those that they know are extremely high risk. Remember - consumers don't go bankrupt until after they cannot pay back a loan - not the reverse. They don't go bankrupt, are further extended credit, and then sink further into helplessness with yet another loan they cannot repay. In fact, most banks won't even extend secured loans out to individuals that have had a recent bankruptcy.

My point is, all major credit card companies that I am aware of, follow the requirements for extending credit (providing the terms and conditions, advertising rates in terms of APR, etc.), which so far consumers and law-makers have found sufficient. If you believe these requirements are insufficient, what would you require of the financial institutions?

Great post, Brad.

I'd be interested to know how Utahns (and more specifically Church members in general) compare to the rest of the US in levels of personal debt.

I agree on some points....

It sounds like your argument is a valid one, although it's a different argument than the one this bill is addressing. It sounds to me that you feel that creditors abuse their influence by charging exorbitant interest rates, and also extending credit to those who aren't what you would consider 'credit-worthy'. It sounds like that is an argument that either financial institutions are operating under deceptive or manipulative practices, or the industry is forming a cartel to price-gauge. Both of which would be interesting topics. That is what I understood from your post - correct me if I'm wrong.

Definitions

actions of the credit card companies I find disturbing: spending millions to lobby Congress to change the rules to accommodate their needs, at the expense (literally) of the general public

shaky credit: bad credit, high credit score (higher is worse, right?); the credit card companies charge higher interest rates to these folks because of their higher risk

Clarification perhaps

Along the lines of risk-based pricing - you agreed with me that this is a logical way of doing business.

Yes.

I have never argued that credit card companies should not be allowed to price discriminate ("risk-based pricing"). Interest rates and late fees, or increases of such located in "the fine print," are not material to my problem with the bankruptcy legislation.

Now...

I said:

Now, we know that millions of people are declaring bankruptcy. And if we accept your premise that people who declare bankruptcy are generally financially irresponsible, then YES, in recent years banks have become more and more willing to "just lend money out to every irresponsible person out there."

You said:

This seems to imply (and now you can correct me if I'm wrong) that banks are lending money out to those that have declared bankruptcy.

No.

What I am implying is that their is a gigantic fallacy in your argument. :)

Again, I would summarize your argument with the following syllogism:

A. People who declare bankruptcy are generally financially irresponsible.

B. It's not unfair to force financially irresponsible people to be more responsible.

C. Repaying one's debts in full is a financially responsible thing to do.

D. Therefore, the bankruptcy reform is good since it forces people who file for bankruptcy to repay their consumer debt (or repay more of it than was previously required).

What I am pointing out is the following:

1. Let us accept your premise that "that the majority of bankruptcy filings come as a result of financial irresponsibility."

2. In order to declare bankruptcy, one must have debt.

3. In order to have debt, one must have been lent money by a lending institution.

4. Lending institutions are able to determine the "credit risk" of individuals, which is why they charge various interest rates based upon "risk-based pricing."

5. Millions of people are declaring bankruptcy, and bankruptcies have been on the rise in recent years.

6. These financially irresponsible people (see #1) were lent money by lending institutions (#2,#3).

7. Therefore, in recent years, lending institutions have been more and more willing to lend money to people that they knew (see #4) were more financially irresponsible than average.

Now, you can argue that there was no way to predict that these folks would enter bankruptcy. But this would require refutation of #4. Both you and I agree that lending institutions have instruments to measure credit-worthiness and are entitled to use these instruments when lending.

And this is exactly my point.

The lending institutions have been making very bad business decisions. They have been lending too much money to too many financially irresponsible people. Again, the lending institutions have been irresponsible. I'm going to say this 'till I'm red in the face.

The lending institutions have been irresponsible.

The lending institutions have been irresponsible.

The lending institutions have been irresponsible.

And to escape their bad business decisions, they have gone to Congress and gotten them to change the rules. They are desperately trying to avoid responsibility for their actions.

BocaJuniors

So nothing besides the fact that they pushed a bill through congress disturbs you? How much did they really spend to push it through anyway? Was it 'millions'? Where did you find those numbers?

There are few, if any, practices that I know of credible banks or credit unions that disturb me in regard to extending credit. However, what does disturb me is the low-end businesses that are designed to do just what you are describing. Pay-day loan places, or Title loans, etc. These guys have created a situation in America where we're not just living from paycheck to paycheck anymore - we're living from next month's paycheck to the next months'. That's what disturbs me.....

As far as major credit card companies go - they are required to issue disclosures with their credit applications that describe the terms and conditions of the credit. Like how LaurenceB was describing the 'fine print' where, if he ever was late on a payment, his APR would jump to nearly 30%. But that's why it's there in the disclosure - because they're required to inform you of that. Also, lendors are required to advertise their interest rates in terms of Annual Percentage Rate - so that it's easily comparable between similar loans at other institutions. These rates are also published at websites like bankrate.com So if a consumer ends up getting an auto loan, for example, at Wells Fargo and gets an interest rate of 9%, when they could've gotten a loan at E-loan for 4-5%, why should we blame Wells Fargo for the consumer not doing their homework?

Financial institutions largely set their interest rates the same way companies set their prices - supply and demand, except with the federal Prime Rate mixed in. Could a bank charge an interest rate as high as they'd like? Theoretically, maybe - but any intelligent consumer would just go somewhere with a lower interest rate! That's how business works. So every company, whether in a perfectly competitive market or a monopoly, is still bound by supply and demand.

Now as far as higher interest rates for those with 'shaky credit'. All lending institutions use what's called risk-based pricing, which means, the higher the perceived risk to the bank, the higher the interest rate they charge. This is to mitigate the risk. What better system do you know of, of separating responsible consumers from irresponsible ones than the credit score system? A low credit score is a result of either bad, or no credit history: even lower after a long overdue payment or a bankruptcy, for example. To me that just makes sense. So if you want to pay lower interest rates - increase your credit score!

Now do banks just lend money out to every irresponsible person out there just so they can charge higher interest rates? Think about that from a business perspective. What would be their incentive for doing that, if they knew they weren't going to get the money back that they were lending out? Even chapter 13 bankruptcy only provides for the consumer to pay back as much as they can over a specified period of time - like five years. This still does not guarantee that a bank will get their money - so if money's not the incentive, what is?

Every major bank in the United States has a credit score just like a consumer would - they are scored based on how responsibly they lend money out, and as a result some banks are very particular about who they will and will not extend credit to. This is also the reason that large banks have a 'financial' company under their corporate umbrella - so that the main retail branch can remain stringent on credit qualifications while the 'financial' company provides credit options to higher-risk consumers. This provides opportunities for individuals with damaged credit to rebuild their credit, rather than just passing them off to the aforementioned "Pay-day loan" or "Check-cashing" back-end-of-the-industry institutions. But again, why would they loan money out to individuals they know will never pay them back?

To me it just sounds like financial institutions are operating under the same business models as every other industry. If the consumer is irresponsible and ignorant of current banking practices, then there is probably a good chance they will end up paying a higher interest rate than they should. But there is nothing stopping them from being responsible and becoming knowledgeable to reduce the amount they are needlessly paying in higher interest rate charges.

Fraudulent practices

Yes, I meant to point out that the credit card companies are already playing some nasty games. But furthermore, I meant to link those nasty games to this bill - since the most immediate and obvious affect of this new law will be to allow them to do even more of that sort of thing without fear of consequences (bankruptcies).

A second item that I would like to emphasize is that the majority of bankrupcies are not the direct result of financial mismanagement. To the contrary, they are most often associated with a life-changing event, such as divorce, job-loss, or medical emergency.

In any case, the law has now passed 75-24. In the long run I guess the thing I'll remember most about this episode was the remarkable solidarity between the left and right blogosphere in opposition to this thing. I suspect it will be a long time before we see Redstates, DailyKos, Josh Marshall, Powerline, Eschaton, Instapundit, etc. all in agreement again. Its too bad there wasn't an organized opposition that got started sooner.

:)

Well that's a very poignant way of putting it. While financial institutions have instruments in place to determine to the best of their ability the credit-worthiness of consumers, it is far from a perfect system. For example, there are alot of college-aged individuals that have no credit history. In cases like this, banks have no information to go off of in determining creditworthiness, so rather than using credit score they use other things - (enrolled in a university? What's their annual income?) Which can only infer responsibility at best. So banks, without purchasing crystal balls or hiring psychics, have no sure way of really being able to determine the financial responsibility of the people they lend their money to. And if they did - again, why would they lend money to individuals they knew they could not collect from? Once again - I don't see how all of this proves irresponsibility on the side of the banks....

nasty games.....

"...credit card companies are already playing some nasty games."

Listen, I know financial institutions are not perfect, but what exactly are these nasty games that they are playing. Both you and BocaJuniors are against this bill on that point, but you have yet to show what those nasty games are, or prove that they are legitimate tactics of the industry. Please substantiate your claims, and I will be more willing to side with you on your position.

Brad, you're argument is a re

Brad, you're argument is a red-herring. Why don't you address what you Boca said? Instead you argue about something that is very minimal in the overall spectrum of loaning money.

"there are alot of college-aged individuals that have no credit history"

Are you implying that the majority of people who declare bankrupcty are college-age students? Where are your stats.

It seems as thought Boca has made a really solid argument. It would be great if you could address it instead of going of in tangents.

nasty games...

By "nasty games" I am referring mostly to ploys such as the one I described previously, where charges and interest rate increases are hidden in fine print, or where payment terms and interest rates are simply too steep to be repaid - essentially leaving the debtor in perpetual servitude.

These credit practices are playing footsies with the law - getting as close as they can to the legal definition of fraud, without actually stepping over. That's why I refer to them as "nasty games".

nope....

Read the rest of the thread.....That was just an example of a time when the credit score system can fail to identify who is responsible and who is not.

Brad, come on...

there you go dodging again. Can you ever address the actual argument?

The bottom line.....

Sure, the bottom line of this whole argument is that this bill is to protect the assets of banks who extend credit. Banks follow currently accepted laws and requirements, and are therefore fulfilling their responsibility. If therefore, there continues to be a large number of bankruptcies filed (and we'll assume that some are beyond the control of the consumer, but the majority are a result of financial irresponsibility) the blame does not fall on the shoulders of banks just because they're trying to protect their assets through legislation. The blame falls on the head of the consumer.

It's true this proposed law includes absolutely no incentive for consumers to apply for less credit, but since this is a bill pushed through congress by the financial services industry in a market economy, it doesn't seem to me that it should. It's up to the consumers to protect the interest of the consumers, and if the federal government or the financial services industry needs to hold America's hand and babysit them in every financial decision they make - then American consumers need to propose legislation to require that. That would be a sad and scary move to expand the scope of government that far - and would show that those pushing the bill through have absolutely no faith in the decision-making skills of the American consumer.

Just because you're paying high interest rates, don't blame it on the bank - raise your credit score, and get educated as to the other options out there......that's the bottom line.