Saturday, March 05, 2005

Bankruptcy Scam: Credit Companies making huge profits on defaulting customers

Even as the Republicans get ready to re-enact the shower scene from OZ on the American people at the behest of credit card companies, the LA Times comes through with a timely piece showing that basic justification of the Bill is a total lie:

In the eight years since they began pressing for the tough bankruptcy bill being debated in the Senate, America's big credit card companies have effectively inoculated themselves from many of the problems that sparked their call for the measure.

By charging customers different interest rates depending on how likely they are to repay their debts and by adding substantial fees for an array of items such as late payments and foreign currency transactionsThe major card companies have managed to keep their profits rising steadily even as personal bankruptcies have soared, industry figures show.

As a result, while they continue to press for legislation that would make it harder for individuals to declare bankruptcy, the companies have found ways to make money even on cardholders who eventually go broke.

The idea that companies are losing their shirts on bankruptcies is a lot of bull," said Robert B. McKinley, chief executive of, a Frederick, Md., consulting group that tracks the credit card industry. "With these rates and fees, the card industry is a gravy train right now."

Credit Card companies have changed drastically in the last ten years and it hasn't been for the better. In 1996, a little- noticed US Supreme Court decision took away the power of most states to regulate credit card companies within their borders. Instantly, decades of consumer protection and fair lending regulation went out the window and credit card companies were free to set their own rules. They wasted no time coming up with a system designed to make them very rich off the backs of the very poor.

Under the companies' new systems, many cardholders -- especially low-income users -- have ended up on a financial treadmill, required to make ever-larger monthly payments to keep their credit card balances from rising and to avoid insolvency.

"Most of the credit cards that end up in bankruptcy proceedings have already made a profit for the companies that issued them," said Robert R. Weed, a Virginia bankruptcy lawyer and onetime aide to former Republican House Speaker Newt Gingrich.

"That's because people are paying so many fees that they've already paid more than was originally borrowed," he said.

This is the BIG LIE of the Bankruptcy Bill debate. Over and over again we've heard it advocates ask "Why should people get out of paying their debts" But the Truth is people DO pay their debts, sometimes many times over, and their balances never get any smaller. For example:

Josephine McCarthy, for instance, a 71-year-old secretary at the Salem Baptist Church, less than a mile from where the Senate bill is being debating. at about the time of her husband's death in 2003 that the couple had a $4,888 balance on a Providian Visa.

Over the two years from 2002 until early 2004, when she filed for bankruptcy, McCarthy charged an additional $218 on the first card and made more than $3,000 in payments, the court papers show. But instead of her balance going down, finance charges --at what the bankruptcy judge termed a "whopping" 29.99% rate, together with late fees, over-limit fees and phone payments fees -- pushed what she owed up to more than $5,350.

This is the Typical person who will be hurt by this bill, she IS paying her debts, but the credit card companies you accounting tricks and hidden fees to steal that money away and never reduce her balance. She would have done as well taking her money and lighting it on fire as paying it to the credit card company

This is the New Credit Card math $4,888 -$,3000 = $5,350!!!

And She's not the only one, nor are these practices confined to Shady operators like Providian:

In Cleveland, a municipal court judge tossed out a case that Discover Bank brought against one of its cardholders after examining the woman's credit card bill.

According to court papers, Ruth M. Owens, a 53-year-old disabled woman, paid the company $3,492 over six years on a $1,963 debt only to find that late fees and finance charges had more than doubled the size of her remaining balance to $5,564.

Judge Robert Triozzi ruled that Owens didn't have to pay, saying she had "clearly been the victim of [Discover's] unreasonable, unconscionable and unjust business practices.

and to accomodate these Sleazy unconscionable companies the Republicans are set to undermine of the basic economic tenets of American Society:

The proposed law, by preventing many debtors from seeking bankruptcy protection, would compel financially insolvent borrowers to continue trying to pay off the old debts almost indefinitely.

"Until now, the principle in this country has been that people's future human capital is their own," said David A. Moss, an economic historian at Harvard University. "If a person gets on a financial treadmill, they can declare bankruptcy and have what can't be paid discharged. But that would change with this bill."

This bill if it passes will be an unmitigated disaster for the priciples of american society and more concretly the economy. In my opinion, its most devastating impact will be on small business. To benefit a few very wealthy corporations we will nearly strangle the the entrepenurial spirit in this country I used to be a contractor for the SBA, and I can tell you many personal Ch. 7 are caused by business failures of small businesses, sometimes through no fault of their own (Wal-Mart and 9/11 hit the small business world like twin Grim Reapers in the last few years). Large corporations can use the Ch. 11 to escape paying THEIR bills while actually giving their executives raises ("rentention bonuses") and that will be unchanged by this bill. A mom-and pop sole proprietor store doesn't have this option. When their business fails, they are on the hook for its bad debts.

They have usually personally guaranteed the business loans,(which can be hundreds of thousands of dollars) often using their family home as collateral. Ch.7 has always been the way out for these people, allowing them to get out from under a failed business while keeping enough of their property and belongings to start Fresh.

This has always been a major incentive to trying to start you own business. You can take a shot, try to build a business; and if it doesn't work out, the business gets sold to the creditors and you move on. With laws that would make you and indentured servant for the rest of your life, who is going to be willing to risk that now?


Blogger heropoo said...

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8:23 AM  

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