Credit Card Bankruptcy Up
Banks raise fees and litigate against fraud
BOSTON — EVER wonder why bank credit card fees began to rise a few years back? One way of looking at it is that half of that fee is used to cover defaults by consumers who declare bankruptcy.
``If they go into bankruptcy there's nothing we can do but write it off,'' says Beth Metzer, a spokeswoman for Sears' Discover card in New York. ``It's definitely an issue that every credit card company faces.''
And the problem is growing. Nearly 600,000 households in the United States declared bankruptcy in 1988, according to a report by Visa U.S.A. Inc. That's one in every 178 - double the rate of personal bankruptcies in 1980.
Robert Johnson of Purdue University's Credit Research Center in West Lafayette, Ind., says nonbusiness bankruptcies rose 12.2 percent in the US in 1989, with the economy still expanding.
``If we're going at 12.2 percent in good times, what's it going to be like in bad times?'' he asks.
Visa expects an increase of 52,000 bankruptcies each year for the next seven years, compared to a 39,600 annual increase from 1980-88. And they will be bigger, averaging $50,000 per filing compared to $37,400 in the earlier period, the San Francisco-based company projects.
The cost per fee-paying bank card account is similarly rising: $3 in 1980, $13 in 1988, and a projected $25 in 1995.
According to Visa and New York-based Citibank, the nation's largest issuer of bank cards, the rise in bankruptcies is caused by several factors. An increase in the availability of credit made overborrowing easier. A change in the law in 1978 made it easier to declare bankruptcy and more difficult for creditors to collect. Advertising by lawyers draws attention to the bankruptcy option. And bankruptcies by notable personalities and companies have lessened the social stigma.
``It's very easy to tell when an honest person through no fault of their own gets into trouble,'' Visa spokesman Gregory Holmes says. ``We want to help them as much as possible.''
Then there are the cases of bankruptcy fraud, such as a car salesman earning $100,000 a year who filed for bankruptcy, declaring $450,000 in unsecured debt. This included $138,000 on 20 Visa and Mastercard accounts, $21,000 on 15 department store cards, and $177,000 in several personal lines of credit and a lease on a Mercedes Benz. He declared expenses of $2,000 a month for recreation and entertainment, $1,500 a month for food, and the same for clothing.
One month before declaring bankruptcy, the salesman transferred title of a 34-foot boat to a relative - a clear sign of fraud, Visa says.
Other types of bankruptcy fraud include understating income and overstating expenses, concealing assets, lying under oath, and concealing or destroying records.
Many debtors could repay
Visa is also critical of bankruptcy ``abuse,'' which it describes as most commonly occurring when a debtor files under Chapter 7 instead of Chapter 13. The former discharges the debtor of all debt, while under the latter some or all of the debt is repaid over the next three to five years.
Dr. Johnson takes a different view. ``I wouldn't call it abuse, because they're doing what they're legally entitled to. You may not like the law.''
In a 1981 study in 10 states, the Credit Research Center found that 20 percent of people who filed bankruptcy could have repaid all their debts within three years. And they would not have had to change dwellings to economize. In another study, the figure was 45 percent.
Abusive or not, debtors who could repay but don't and those who engage in fraud cost the bank card industry $650 million last year, 40 percent of its total bankruptcy writeoffs, Visa says.
Such cases used to go unchallenged because the debts were smaller than the likely legal fees for contesting the filing. But complaints by Visa's 22,000 card-issuing member banks have become so frequent, Mr. Holmes says, that Visa launched a program to help them fight back.
When they receive notice of a bankruptcy filing, the banks review the account transaction histories. If at least two banks find signs of fraud or abuse, they notify a lawyer whose services they share. The lawyer then challenges the filing, and this alone often convinces the debtor not to pursue bankruptcy. If the banks file suit and win, they can collect on the debt for up to 20 years.