Credit Card Industry Puts Squeeze on Strapped Debtors

'Reaffirmations' sound friendly, but Sears used these deals illegally

Watch out, credit card users!

The squeeze is on, sometimes illegally, from the credit card industry.

And while the industry grows tougher, consumers become weaker, as record numbers of borrowers seek bankruptcy protection.

For lenders, aggressive debt recovery helps protect valuable profit margins, up to four times higher for credit cards than most consumer loans, experts say.

Visa U.S.A. Inc. acknowledges the shift in a confidential report.

"Over the past decade, members have become increasingly more aggressive in seeking recovery of bankruptcy losses," says a September 1996 survey by Visa.

Card issuers "will have to become even more aggressive ... to manage the inevitable increase in bankruptcy losses," the report adds.

Lenders have every right to try to collect their debts, of course.

But critics charge the lenders with helping fuel the bankruptcy surge by increasingly targeting customers with low credit quality.

And in at least one case the recovery methods were illegal.

Sears Roebuck & Co. recently conceded that from 1992 until this April 1 it "exercised flawed legal judgement" by insisting on "debt reaffirmations" nationwide.

Under a reaffirmation, Sears would persuade customers seeking bankruptcy protection to continue making debt payments to Sears.

The law, however, requires creditors such as Sears to stop seeking debt repayment from customers under protection of the bankruptcy court.

Sears, based in Hoffman Estates, Ill., admittedly broke the law by failing to request the approval of bankruptcy courts in at least 2,700 reaffirmation cases in Massachusetts.

Last week, the US attorney in Boston filed a nationwide lawsuit against Sears, accusing the nation's No. 2 retailer of "a scheme or artifice to defraud."

Sears has already agreed to compensate the the 2,700 cardholders, but the size of the settlement hinges on the nationwide suit.

Sears is not alone in facing a boom in delinquent debt.

LAST year, 1.12 million people filed for bankruptcy, and such filings have surged 150 percent over the past a decade.

More will likely follow if the economy slows down. "Clearly the bankruptcy picture in the US has taken a decided turn for the worse, and that trend is likely to continue," says the Visa report.

So far, analysts say, the card companies are not badly hurt.

"Credit card companies are doing very well. They just would like to do better," says Marianne Culhane, a professor at Creighton University Law School in Omaha, Neb.

Card issuers have dramatically improved debt recovery. Visa issuers last year regained $12 for every $1 spent in recovery efforts, up from $6.90 in 1993.

Lenders are also taking their battle to Congress, pushing for bills that limit bankruptcy protection.

Experts generally blame reckless borrowers for rising bankruptcies.

Revolving consumer credit last year rose nearly three times faster than personal income, says the Consumer Federation of America in Washington.

But analysts say creditors themselves share responsibility.

Early this decade, credit card issuers embraced a tactic called "bottom feeding" to increase market share.

In 1993, 40 percent of households with incomes less than $20,000 received credit card offers. By 1996, the number hit 58 percent, says Credit Union Magazine.

"If I can charge you 21 percent on a credit card because you're a bad credit risk, and it only cost me 7 percent to borrow the money ... I can survive an awfully high default rate and still make a lot of money," says G. Ray Warner, of the University of Missouri Law School in Kansas City.

Sears says it has not engaged in "bottom feeding." Nor has it altered its credit standards for at least five years, says spokeswoman Paula Davis. Still, the retailer relies on its credit operations to generate half of net earnings. In fact, the Sears card aided a dramatic turnaround of the company since 1993, analysts say.

At the same time, though, bad debts were rising. During last year, credit write-offs surged quarter-to-quarter by more than 50 percent, says Ms. Davis, higher than what experts consider the industry norm.

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