Thoughts of an American Centrist

Wednesday, April 27, 2005

There is something missing from this Bankruptcy Bill. Part 2, Regulation of the Credit Industry

I am not one of those critics who believe that any type of individual bankruptcy reform is an affront to human dignity. Indeed, I believe that we could all benefit from a proper does of responsibility. Still, I maintain that the Bankruptcy Bill of 2005 is, well, missing something. I'm launching a series of posts detailing all of the issues I would have liked this bill to have addressed, because without them, the bill seems incomplete.
In Part 1, I discussed possible reforms to Chapter 11 (Corporate Bankruptcy) Law.

Today, in Part 2, we'll look into regulation of Credit Providers.

Although it is true that job loss and medical bills are the direct cause of more than half of all the personal bankruptcies in the United States, many families in these situations would never have fallen all the way to bankruptcy were it not for their heavy reliance on credit cards during their time of need, and their subsequent inability to pay off those cards due to the additional fees and charges added on a monthly basis by the companies controlling them.

Obviously, there is going to be a premium to pay for such easy and accessible lines of credit that these cards provide. Americans are well aware that those who cross the line of using plastic for actual credit rather than convenience will be hit by large interest charges each month that effectively put a 10 to 2000% premium on everything they buy, depending on how long it takes them to pay off the card.

When an individual is trying to get back on his or her feet, these premiums can impair that process for months or years after a catastrophic event. Add on top of the interest charges the outrageous fees the credit providers charge for honest mistakes or delays on mail. For someone trying to get out of debt, a payment arriving 12 hours late can be devastating, not just because of the additional $30 - $50 that is added to the balance, but because such a trivial oversight can immediately launch the card's interest rate by several points. It is the combination of all these fees and spiraling interest rates that can keep an unused card's balance actually growing, despite its embattled owner making faithful monthly payments.

Of course, the credit card companies are simply trying to run a business. They take risks by issuing cards to risky customers, and may loose five figure balances in bankruptcy court. People simply canceling their debts hurts business. The Centrist understands this, and therefore must take into consideration the viability of the credit industry into any proposed solutions. I believe that with a little thought, we can hammer out some regulations that protects both the consumer, and the businesses.

  1. Outlaw No-Credit-Check Cards

  2. The Credit Card industry simply loves to market their wares to people who simply cannot afford them: broke college students, people already floating on credit, chronic defaulters. They do this for several reasons. First of all, they expect these types of people not to pay their balance every month, and therefore become their biggest revenue generators. Secondly, whenever that person uses their card, they charge a premium to the merchants. The more card-holders, the more money off of purchases.

    Unfortunately, it is these same risky customers that cause many of the bankruptcies in this country, and drive up interest rates and charges across the entire industry. Simply denying credit to people who cannot be responsible with it removes a huge risk factor from the credit card companies, and could allow them to relax their penalties.

    Of course, this type of reform will further restrict the options of someone who is already in trouble financially. However, getting a high interest rate card that they cannot pay off is never a viable option for actually pulling oneself out of a financial hole. Instead, restricting their options may force them to cut back on their spending, budget, or maybe consolidate their debt into a more manageable bundle. Adding one more card simply delays and exacerbates the inevitable.


  3. Create a Ceiling on Interest Rates

  4. Twenty years ago, there was no such thing as a 20% APR credit card, let alone a 24.99% one. Still, the credit card companies thrived. The racking up of risky customers (see point 1), has virtually necessitated this rate hike, however. If the riskier customers are eliminated, there should be no problem regulating a maximum interest rate (say, 17%) on credit cards.

  5. Require Mediation before Bankruptcy

  6. Just as corporations negotiate with their creditors before filing bankruptcy, so should consumers. There seems to be a mentality in America that states "if you can't pay it off, just file for bankruptcy and everything goes away." The new Bill will divert more people into programs where they try to pay off their debts before they are dismissed. This is a good thing, as I believe people should pay for what they buy in all but the most extreme circumstances. However, that payment schedule and negotiations are all set up and mandated by the courts, which is costly in terms of both time and money to our government. Why not have mediation boards that people must apply to in order to restructure their debt before filing for bankruptcy? We already have the infrastructure with innumerable counseling and consolidation services. Consumers and creditors should at least attempt to work something out between them before getting the government involved.

  7. Increase the "Minimum-Payment" threshold

  8. The "minimum payment" printed on a monthly credit card statement is simply too low, and too tempting to someone in trouble. By doubling the amount of the minimum payment required for the month, consumers would pay off the card an order of magnitude faster than the current minimum payment system. Granted, this will make it tougher in the short run for cash-strapped people who they are trying to get back on their feet, but it will keep them more secure in the long run. It will also make them less likely to end up in bankruptcy court.

  9. Create a Graduated penalty scale for chronic late-payers

  10. Someone who is trying to pay off his or her balance by sending in payments faithfully every month should not - upon being late for one month - receive the same treatment as an irresponsible person who is late many times per year. Unfortunately, most of the companies have implemented a "one strike and you're out" policy for people who make honest mistakes (there is a similar complaint about the IRS, but that's the subject for a different post). Start late payments off at no more than $5, and increase them as consumers fail to pay for several days, or if they do it again within a few months. This way, honest mistakes are still penalized, and chronic offences are still discouraged, but a one-time penalty does not cripple those who are trying to do the responsible thing and "pay it all off."

  11. Eliminate Automatic Rate increases for late payments

  12. This proposal goes hand-in-hand with the one above. Someone trying to pay off their balance over the course of several months can be cut off at the knees simply by making one late payment, thus incurring a rate jump of several percentage points. At all costs, we should not be making it harder for people to pay off their balances!
And there you have it, the American Centrist's six proposed reforms to the credit industry. Granted, each of these reforms will incur bitter complaints from both industry and consumer groups (not to mention the ardent anti-regulation folks), but I believe that they will go a long way to reducing the number of personal bankruptcies in this country. We cannot propose a solution to ending bankruptcies that places the burden either entirely on the consumer, or entirely on the creditor. A solution must involve concessions and additional responsibilities from both parties. These proposed changes won't keep everyone out of bankruptcy, but it should do a lot to help people who briefly came upon hard times, but are now trying to recover and continue to strive for the American Dream.

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