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.


  • This comment has been removed by a blog administrator.

    By Blogger Steve Austin, at 1:17 PM  

  • This comment has been removed by a blog administrator.

    By Blogger credit6sec, at 8:26 AM  

  • Apparently, when you write a post about bankruptcy, you're putting up a big sign that says "SPAM ME!"

    By Blogger Jonathan C, at 12:47 PM  

  • Hey, you have a great blog here! I'm definitely going to bookmark you!

    I have a credit cards for bad credit site/blog. It pretty much covers credit cards for bad credit related stuff.

    Come and check it out if you get time :-)

    By Blogger Credit Center, at 2:16 AM  

  • Nice post, please check out my blog on US Bankruptcy Court

    By Blogger petindex, at 9:53 PM  

  • Great post. I too have a blog about bankruptcy form . let me know if you want to trade links.

    By Blogger Pet Index 2, at 10:04 PM  

  • Nice post, please check out my blog on bankruptcy law

    By Anonymous Anonymous, at 10:04 PM  

  • Good post, check out my blog on do it yourself bankruptcy

    By Blogger Bankruptcy, at 2:20 AM  

  • Great post. I too have a blog about file bankruptcy . let me know if you want to trade links.

    By Blogger Pet Index 2, at 3:41 AM  

  • Great post. I too have a blog. Its about chapter 7 bankruptcy so please check it out.

    By Anonymous Anonymous, at 4:25 AM  

  • Blog is informative. Don't stop. This may be of interest to you information and free reports about mortgage after bankruptcy go to Bad Credit? No Problem! Thanks again for the info!

    By Blogger Paul, at 11:18 PM  

  • Hi, Thank you for having this info on the web. I enjoyed your post. If you may have any interest in
    debt consolidation
    then I know where you may get your solution. For your comfort, I have enclosed the link, so if needed you can visit the site. Thanks again for your lovely blog. credit

    By Anonymous harry, at 3:05 AM  

  • I like this blog you created

    home insurance uk for let properties

    By Anonymous Anonymous, at 6:39 AM  

  • Hey great site.
    I was seaching the web and came across yours.

    Gerald E.
    hire interior designer chicago

    By Anonymous Anonymous, at 9:17 AM  

  • I just came across your blog and wanted to
    drop you a note telling you, Friend, how impressed I was with it.
    I give you my best wishes for your future endeavors.
    If you have a moment, please visit my site:
    loans center
    It covers loans center related contents.
    All the best!

    By Blogger Paul Adams, at 5:20 PM  

  • Great Blog! I love to see informative sites and active discussion. I have bookmarked this site so I can check in from time to time. If you have a chance check out this site http:\\ which has alot of valuable info on Custom Mortgage Thanks again for the Blog

    By Blogger Debt Consolidation Refinance, at 1:35 AM  

  • Hey Fellow, you have a top-notch blog here!
    If you have a moment, please have a look at my make some easy money site.
    Good luck!

    By Anonymous make some easy money, at 3:51 PM  

  • This is an excellent blog. Keep it going.You are providing
    a great resource on the Internet here!
    If you have a moment, please take a look at my bad credit business loans site.
    Have a great week!

    By Anonymous bad credit business loans, at 9:15 PM  

  • Hi there Blogger, a real useful blog.Keep with the good work.
    If you have a moment, please visit my secured credit card site.
    I send you warm regards and wishes of continued success.

    By Anonymous secured credit card, at 2:00 AM  

  • Hi there Blogger, a real useful blog.Keep with the good work.
    If you have a moment, please visit my secure payment processing site.
    I send you warm regards and wishes of continued success.

    By Anonymous secure payment processing, at 4:48 AM  

  • Debt Settlement
    Debt Relief can help you reduce your interest burden by charging an interest rate lower than the rate on your existing loans. Debt consolidation loan can also allow you to make small monthly payments by extending the loan period

    By Anonymous Anonymous, at 11:47 PM  

  • Hello Friend! I just came across your blog and wanted to
    drop you a note telling you how impressed I was with
    the information you have posted here.
    Keep up the great work, you are providing a great resource on the Internet here!
    If you have a moment, please make a visit to my bad credit loan personal usa site.
    Good luck in your endeavors!

    By Anonymous bad credit loan personal usa, at 4:16 PM  

  • Dear friends, Now you can help yourself take advantage of the huge surpluses of FREE advertising in your spare time, in the comfort of your own home. Hook up NOW with this exiting program. Click here: FREE INFORMATION

    By Anonymous Scott Arthur Edwards, at 12:38 AM  

  • Good afternoon many have machines which not insuranced,
    you have a unique opportunity only today to receive insurance the machine free of charge
    [url= ]auto insurance[/url]
    [url= ]auto insurance[/url]
    [url= ]cars insurance[/url]
    [url= ]cars insurance[/url]
    [url= ]texas car insurance[/url]
    [url= ]texas car insurance[/url]
    [url= ]car insurance quotes[/url]
    [url= ]car insurance quotes[/url]
    [url= ]car insurance policy[/url]
    [url= ]car insurance policy[/url]
    [url= ]xanax[/url]
    [url= ]phentermine[/url]
    [url= ]buy tramadol[/url]

    By Anonymous Anonymous, at 4:41 AM  

  • Hi people
    I do not know what to give for Christmas of the to friends, advise something ....

    By Anonymous Anonymous, at 9:26 AM  

  • Hello. Good day
    Who listens to what music?
    I Love songs Justin Timberlake and Paris Hilton

    By Anonymous Anonymous, at 5:12 AM  

  • I have noticed that American Express Gold continues to sweeten the pot each year with more and more benefits to keep the card competitive with other credit cards that bear an annual fee.

    By Anonymous Anonymous, at 2:22 AM  

Post a Comment

<< Home