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Why Credit Card Deals of the 1980s Lead to Increased Bankruptcy Cases in 2008

2008-01-25

When it comes to a bankruptcy case in the USA, two major behavior types of credit consumers who file are distinguished. One moves heaven and earth to make more than the minimum monthly payment on his credit card bill and has no record of a missed payment at all. Still, he/she is running a mount of credit card debt which is never going to expire in the coming 30 years.

The other debtor ignores the threats of collection agencies and continues to default on his account, being, naturally, a most obvious candidate for bankruptcy filing. Why did such different people appear in a similarly terrible situation? Let's look back into the year of 1978.

The United States Supreme Court provision that granted banks freedom to charge interest rates allowed in their own state customers all over the country resulted in a lending boom. Credit was offered to each and all and interest rates could run up to the exorbitant 30%.

The two above mentioned credit consumers are the no surprising products of the credit industry deregulation initiated and swung in the 1980s. However, let's imagine that both of them borrowed money in about 30 years ago. Did both of them have to file for bankruptcy and if yes, how did the procedure affect them?

No doubt, as a result of the Supreme Court's decision, consumer credit card debt rose and so did the percentage of bankruptcies filed. So, both the cardholders saw bankruptcy as the final resort, as the only way out of the ever mounting unsecured debt.

However, a customer owning a consumer or a business credit card, who ended up in debt by a reason far beyond his/her power (loss of job, disease or death of a breadwinner), had a protection provided by the Bankruptcy Reform Act of 1978.

Surprisingly enough, the second type, the one defaulting on his account on purpose, was also eligible for protection if his debts were impossible to repay. So, the protection allowed the cardholders to have a write-off of the enormous debt and start a new life.

Banks were highly discontent though with the provision as the number of bankrupts grew, depriving the lenders of a great share in the form of default APRs and late payment fees. Instead of eliminating their predatory policies of issuing too easy credit to poor working customers and imposing unmanageable rates and late payment fees or reducing credit card payments, companies sought toughening of the Bankruptcy Reform Act of 1978 and succeeded in it.

In 2005, a new federal legislation named Bankruptcy Abuse Prevention and Consumer Protection came into force, making it more difficult for all hopeless debtors to file bankruptcy, no matter what caused the debt - irresponsibility or uncontrollable circumstances.

The new legislation required that a bankrupt go under Chapter 13 where he/she was obliged to go through a debt repayment plan based on the amount of debt and a number of other factors.

So, the number of bankruptcies has not fallen since 1978, instead the number of debtors enslaved to credit companies has grown considerably.

Bankruptcies grow due to one aggravating factor - in spite of already fat balances on customers' accounts, lenders still continued to offer all kinds of credit card deals, knowing it beforehand that if it comes to bankruptcy filing, the customer will still have to return some part of the money lent under Chapter 13 provision after, of course the customer pays all the possible credit rates and fees charged for his/her defaulting.

Credit card can still be a convenient and effective payment and money management tool but you have to watch out every of your lender's steps and avoid carrying any little balance.

it's not fair that you have to file bankruptcy only because you became a victim of an identity theft