My blood boils when I read tripe like this pitch from a lender promoting a debt consolidation loan: it’s not a loan, says the headline, it’s a way out of debt. I’m sorry, but that’s baloney.

About sixth grade, I learned that 3+7 and 5+5 both equaled 10. No matter what order the numbers came in, they still totaled the same sum.

Likewise, a consumer is no better off if, instead of having five accounts of $2,000 each, they have one account of $10,000. They still owe $10,000. As my colleague Kurt O’Keefe wrote, you can’t borrow your way out of debt.

My clients, to a man (or woman), want to pay their debts. They are looking for any alternative to bankruptcy. But to call more borrowing a “way out of debt” is like consulting the Humpty Dumpty for financial advice. He, at least, was open that words ” mean just what I choose them to mean”.

The elderly are a growing percentage of bankruptcy filers. The reasons are myriad: health care costs, inadequate retirement savings, and financial entanglements with family. The trend to market home equity loans as a way to live better makes it less likely the mortgage is paid off when retirement arrives.

The question, “Should I file bankruptcy?” is usually most easily answered for the elderly. Younger clients with a significant remaining working life may have options for avoiding bankruptcy. Those options are not generally available for those at the end of their working lives. Incomes will not increase over time. Minimum payments on credit cards are calculated to pay off even small balances over 20-40 years! Seniors don’t have 40 years.
The stress of being in the bill collectors’ cross hairs is less tolerable for the elderly, even if nothing they have would be available to satisfy a judgment.

Discussing money with a senior generation is not easy, but it needs to be done. I’ve seen a number of cases where it is not until there is a crisis that adult children learn that their parent has been living with unmanageable debt. Too often, the senior has stinted on food or medication in order to make the minimum payments on credit cards.

The rational choice may be bankruptcy and a debt free old age.

Jay Fleischman discusses whether the failure to correct a credit report after a bankruptcy discharge is really a violation of the discharge injunction. I have experienced two very real examples of how the continued reporting of discharged debt shadows a debtor’s fresh start.

The first is in the insidious use of credit scores for pricing of insurance. I find no linkage between credit worthiness and insurance claims. It appears to me to be a situation where Fair Isaacs, or other providers of credit scores, has sold insurers on the idea. Why should the insurers resist? It gives them a reason to increase premiums.

More distasteful in my mind is the situation where a homeowner has a refinance or home purchase in process. When the lender finds a credit report still studded with apparently unpaid debt, the would be borrower must chose between paying the discharged debt or losing the loan. Nice work for the creditor: do nothing, even when the law requires you to report correctly, and garner money to which you have no right.

Today’s experience with credit card issuers topped the tale I was told last week by a new client of hopeless insolvency and an enhanced credit offer from a card holder to whom she already owed half of her annual salary: today’s offer of a new credit card was delivered to my client at the address of her bankruptcy lawyer, me!

This client has not, on my instructions, paid her existing credit card debt of over $200,000 for at least nine months. The link between her name and my address can only have come from contacts between collectors on the existing debt and my staff, who have been telling collectors that we do intend to file a bankruptcy case for the woman. Ironically, we did file her bankruptcy at the end of June.

Add to this the fact the woman has no income of her own, and her spouse owes even more than she does. And Bank of America offered her a “pre approved” credit card delivered to my office.

It is hard to believe, as the creditors lobby claimed, that all the blame for consumer bankruptcies lies on the heads of borrowers when lenders hand out credit like advertising flyers.

I’m being hounded by bill collectors; or, more precisely, ATT’s long distance arm. You see, I called up and canceled my long distance service at home after seeing that my marvelous “plan” cost me $13 a month whether or not I made any long distance calls. The guy in the call center overseas tried to talk me out of canceling, but I insisted.

Only it seems he didn’t cancel the service as directed and I continued to get bills, which I refuse to pay. The bill for something I didn’t want is now up to $43. Over the past couple of weeks, we’ve gotten 6-10 calls a day from ATT.

Usually, our phone is dialed by a computer program and there is dead air when you pick up the phone. If you wait on the phone long enough, either a recorded voice tells you “this is an important message from ATT” or you get the guy with the script in the call center in India who cannot/will not address the dispute. He only wants to know when I will pay. “Never” doesn’t seem to be in his vocabulary.
I often advise clients who must wait to file a bankruptcy case to utilize their rights under California’s Rosenthal Act to tell creditors not to contact them. California’s law imports a bundle of consumer rights from the federal Fair Debt Collection Practices Act and applies them to the original creditor as well as third party collectors. The federal act only applies to debt collectors and not to the original creditor.

Though I’ve been handing out a sample letter to invoke the right to be free of harassing calls for several years now, but have no real feed back on whether creditors and collectors actually honor the right to peace at home.

So, I’ve become an experiment in my own practice: I sent ATT a do-not-contact letter on July 2, return receipt requested. By sending it RRR, I will have proof of when ATT gets my letter. We are keeping a log at home of each of these ATT collection calls, so I can cross check receipt of the letter with the calls we get.

Stay tuned for the next episode of consumer vs. The Phone Company (for those of you who’ve seen the old movie The President’s Analyst.) See Part Two: Taking my own advice

Those in a financial bind have to make hard decisions about who to pay when there isn’t enough to pay everyone. The most aggressive creditors, the credit card companies, have the lowest priority in my view of who should get paid. Shorting your obligations for housing, car payments, taxes and student loans all have far larger and more immediate consequences for non payment than unsecured credit card debt.
Student loans? you say. It’s tempting to put repaying student loans on a back burner. The availability of deferments suggests that regular payment on student loans may not be all that important. Consider that unpaid interest on student loans is added to principle, so that you incur interest on last month’s unpaid interest in the following month. You don’t need to have been a math major to understand how expensive compound interest gets over time.

A less well known consequence of not paying on student loans is that any hope of discharging student loans in bankruptcy requires that the borrower have made a good faith attempt to repay the loan before seeking its discharge.

Courts have found that borrowers otherwise eligible for the discharge of their student loans in bankruptcy are barred from relief because they paid other debt instead of their student loans. Paying the squeaking creditor rather than the student loan had enormous and unanticipated consequences. Borrower beware.

In the space of 24 hours this week, I saw two clients with substantial credit card debt who had been servicing that debt faithfully and at a substantial sacrifice , hanging on to the slippery financial slope, when a single irregularity in payments to one creditor sent their interest rates from 4-9% to 30%. For each client, that was the triggering event: they made an appointment with a bankruptcy lawyer.

An objective look at the impact of using universal default as a “reason” to increase the interest rate on a card that is being paid according to terms suggests this is horrible policy. In the cases of my clients, the card issuers turned a performing account being paid by someone who could probably never have paid off the balance in full, and thus would be paying interest forever into a bankruptcy write off. Good going guys.

As the heat in Congress increases on credit card issuers, some claim to have abandoned the practice of universal default. Consumer Action’s latest study of credit cards says it isn’t so.

In a macabre way, I guess in my line of work, I should applaud universal default: it instantly brought home to my client base that credit cards are rigged against the consumer and that pretending that you can pay them off is self deception. Anyway, I have two new bankruptcy clients.

Cathy Moran

Bankruptcy in Brief

At a hearing on the effect of the bankruptcy “reform” bill held in the Senate right after the fall elections, the American Bankers Association piously testified about the care with which its member banks solicit new credit card accounts. The blame for debt that a consumer could not repay was not, they recited, the result of careless or over aggressive lending practices.

This was the chorus that lead to the enactment of the ill titled Bankruptcy Abuse Prevention and Consumer Protection Act in April, 2005. Consumers, they said, were responsible for taking on more credit than they could handle and were calculating in using bankruptcy to escape repayment. The door to bankruptcy relief must be narrowed, they said, and thus we have bankruptcy “reform”.
In February, 2007, CardTrak reported that since bankruptcy reform, credit card companies sent out 8 billion card solicitations, up nearly 1.5 billion over the number send in 2005. I don’t think it overly cynical to say that banks are rushing in to sell more of a highly profitable credit product, secure in the knowledge that the traditional safety valve for the consumer found in bankruptcy had been plugged.

Jed Berliner at Bankruptcy Law Network says he’s getting fewer credit card solicitations in his mail. I, however, have been saving the credit card solicitations sent to my two college aged sons, both of whom are full time students without meaningful employment. They get on average a solicitation a week from one aggressive lender or the other, promising 0% interest, no annual fee, a “confirmed offer.”

I find it hard to construct a portrait of “responsible lending” from these pieces.

In the flurry before the effective date of BAPCPA, the bankruptcy “deform” act, I encountered two articles on the role of credit cards in the economy of American familes. Borrowing to Make Ends Meet looks at the growth of credit card debt during the 90’s and concludes that the increase in housing and health care costs at a time when incomes were stagnant is a large part of the problem.

The findings of that study are expanded with policy proposals in The Plastic Safety Net: The Reality Behind Debt in America.

Eliminate the “penalty pricing” trap

Apply principles of basic contract law to credit card agreements

Disclose the cost of making minimum payments

Ban binding artibration clauses

Hear, hear!

Cathy Moran