Bill gives industry too much credit

By ROBERT TRIGAUX, Times Business Columnist
Published April 15, 2005

Here's how the new bankruptcy legislation approved Thursday by Congress really should have been crafted.

In exchange for banks, credit card companies and retailers getting a tough law that will force more consumers to pay more of their debts in bankruptcy, lenders should have agreed to a cap on the insane volume of direct-mail credit card solicitations they dump on consumers.

Somehow, that idea was never considered. But it seems only fair. If President Bush signs another probusiness piece of legislation to plump credit card industry profits, then the card business should stop supersaturating American households swimming in debt.

Don't e-mail me arguing that "if people were more personally responsible they would not be overwhelmed with debt." I agree, to a point. But Congress ignored the facts that more people get into credit trouble because of lost jobs, huge medical bills and other hard-to-anticipate problems than do people who just can't stop spending at the mall.

A study conducted by doctors at Harvard Medical School and published in the February issue of Health Affairs found that half of bankruptcies, involving 700,000 American households and affecting more than 2-million people annually, are attributable to illness or medical debt.

It's really a two-way street. If consumers need to show more discipline, so do the providers of credit. That's why this biggest rewrite of the bankruptcy code in 25 years is so one-sided and flawed.

How fitting this matter should fall on April 15, our national deadline to pay taxes. A survey by the Cambridge Consumer Credit Index finds that 11 percent of Americans this year will borrow money on their credit cards to pay their tax bill. That's up from 3 percent who used credit cards in 2004.

The credit card industry's aggressive strategy over the past 20 years was to give everyone multiple credit cards. It's a big reason U.S. consumers became hooked on consumption and completely lost the ability to save.

Credit card solicitations have doubled to 5-billion a year. That's about 18 credit card solicitations for every man, woman and child in the United States. And the solicitations are getting bolder in pursuit of the vulnerable.

Seniors, including those who learned to shun debt in the Depression, are a rapidly expanding market for credit cards. The big lure? Paying for expensive prescription drugs on credit.

Minors younger than 18, with no incomes and no credit history, are targeted as an emerging market for the credit industry. College-age students, besieged with credit offers and high tuition bills, on average leave school (often without a job offer) with $18,900 in student loans and an average $3,262 in credit card debt.

The plastic barrage is impressive. At the end of 2004, Americans carried 657-million bank credit cards, 228-million debit cards and 550-million retail credit cards.

That means each household boasts 6.3 bank credit cards, 2.2 debit cards and 6.4 retail credit cards, according to CardData. In 1990, each household had 3.4 bank credit cards, 0.1 debit cards and 4.1 retail credit cards.

Look for 1.5-trillion payment cards in the United States by the end of this year.

When was the last time you applied for a credit card and were turned down? What the industry has created is a dependency on easy credit.

The parallel to drug addiction is not farfetched. Now hooked, more consumers can be squeezed for more money. Even in bankruptcy.

The new bankruptcy legislation is not all bad. It probably will catch some perennial deadbeats in its wide filters. But it will hurt many more consumers with legitimate need of bankruptcy protection along the way.

Professor Elizabeth Warren teaches bankruptcy law at Harvard Law School and has written extensively about the rising financial, social and political pressures undermining the U.S. middle class.

She points out that a million men and women each year turn to bankruptcy in the aftermath of a serious medical problem, even though 75 percent of them have health insurance.

She says a family with children is nearly three times more likely to file for bankruptcy than an individual or couple with no children.

She notes that more children live through their parents' bankruptcy than through their parents' divorce.

And Warren warns it is women who disproportionately will bear the brunt of higher costs, more restrictions and less protection from the legislation. Women are the largest demographic group in bankruptcy, outnumbering men by about 150,000 per year.

Rep. David Dreier, R-Calif., praised the legislation because it would allegedly save American families an average $400 a year in higher interest rates now charged to consumers to recoup losses from those who abuse bankruptcy proceedings.

That's laughable.

Sure, there might be some modest amount of money saved from fewer bankruptcies. But who really believes the kindhearted credit card industry will take those savings and, in place of higher profits, return it to consumers in the form of lower interest rates?

Counselor shortage: Bankruptcy filers face delays

A new era of bankruptcy law begins today amid fears that a lack of qualified credit counselors could lead to major service delays and paid "counseling'' conducted solely by phone or automated Internet programs.

Under the new U.S. bankruptcy law, people seeking personal bankruptcy must first attend mandatory credit counseling at approved agencies.

But a Herald review shows that only one Massachusetts-based credit counseling agency has been approved so far that can provide in-person counseling for local people seeking bankruptcy.

And that firm - Community Service Network Inc. of Stoneham - admits it's currently understaffed and needs infrastructure improvements to handle inquiries from potential customers.

Meanwhile, the five other credit counseling agencies approved to do business in Massachusetts are based in Georgia, Texas, Michigan and California - and anyone using their $50 or more counseling services will have to do so via phone or Internet.

"There's a lot of disorganization and a lot of scrambling going on,'' said Travis Plunkett, legislative director of the Consumer Federation of America. "It could take months or longer to work out (the problems) in this new system.''

Plunkett expressed concern that those who want face-to-face counseling won't be able to get it - and those who prefer phone calls may find service lines jammed.

"There absolutely could be a shortage'' of approved credit counselors, said Deanne Loonin, an attorney with the National Consumer Law Center in Boston. "We have some pretty serious concerns.''

The U.S. Trustees, an arm of the Justice Department that is overseeing the program, has approved only 50 credit counseling agencies nationwide to handle the mandatory counseling services. More are expected to be approved in coming weeks and months.

But the Internal Revenue Service has said it may move to yank the nonprofit status of the largest credit-counseling agencies - a move that could further strain the new system as it struggles to get off the ground.

Jane Limprecht, a spokeswoman for the U.S. Trustees, said her office doesn't think there will be major problems in coming weeks. She added the U.S. Trustees are working hard to implement tough counseling requirements and guidelines.

Bankruptcy lite: Dark side of credit counseling - Part 3

Barry-Smith said not all counselors clearly stipulate that debt management or debt consolidation can harm someone's credit rating.

David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, said the industry is aware of past abuses by some counselors and is cracking down on the problem. "We have very strong standards,'' he said of his membership requirements.

But Plunkett said one of the problems is simply trying to determine which counselors provide quality work and which don't.

"I've covered this industry for seven years,'' he said, ``and even I have a hard time figuring out'' who provides good services.

Bankruptcy lite: Dark side of credit counseling - Part 2

Last year, Reilly's office cracked down on one Massachusetts credit counseling agency, Agawam-based Cambridge Credit Counseling Corp., which the attorney general claims had charged unfair fees and ran operations like a for-profit company. Reilly's lawsuit against Cambridge Credit is still pending.

Credit counselors, who legally must be nonprofit in Massachusetts, are supposed to help customers with debt management and other services. An agency typically negotiates with creditors for lower interest rate payments. Customers then hand funds over to counselors, who in turn pay off creditors.

But Barry-Smith said counselors sometimes charge upfront fees of $150 to $1,500, with monthly fees ranging from $30 to $50.

Often the fees are so high, said Barry-Smith, that they wipe out any savings customers may have gotten from lower interest rates negotiated by credit counselors.

Deanne Loonin, a staff attorney at Boston's National Consumer Law Center, said the new bankruptcy law sets no limits on fees, though the statute says they should be "reasonable.''
To make matters worse, someone who uses debt management - with payments negotiated and made through credit counselors - may see points knocked off their credit ratings for using a third party to help manage their finances.

A spokesman for Trans Union, one of the major credit-rating bureaus, acknowledged that debt management can sometimes harm consumer credit scores, depending on how it's reported to the agency by creditors.

He gave no other specifics.

However, a spokeswoman for Experian, another credit-rating firm, said her company does not view debt-management as a negative factor in credit scoring.

Nonetheless, the message a consumer sends to banks and other lenders when using debt management services is clear: I needed help to pay my bills.

Debt consolidation - in which people combine credit-card debts into one new loan account, usually at lower interest rates - may also knock a few points off of someone's rating. The theory is that people have taken out a new loan - and therefore it's a new risk.

Bankruptcy lite: Dark side of credit counseling

To thousands of over-extended consumers every year, it looks like a face-saving alternative to the unpleasant consequences of personal bankruptcy.

But the relentless come-ons from credit counselors to debt-ridden Americans rarely mention the exorbitant fees that are often involved, or the industry's dirty little secret: third-party debt management can be hazardous to your credit score.

Attorney General Tom Reilly's office routinely receives dozens - and sometimes hundreds - of complaints a year about shady credit counselors known for lining their pockets at the expense of desperate customers.

But next week, a new federal law will require those who are seeking personal bankruptcy to first attend credit counseling sessions - forcing financially vulnerable people into the clutches of an industry with a questionable record.

It is so riddled with unscrupulous operators that the Internal Revenue Service said earlier this week it may yank the tax-exempt status of about 20 credit-counseling firms nationwide - accounting for half the industry's revenue - due to hundreds of complaints about deceptive business practices.

"Congress couldn't have picked a worse time to mandatate use of credit counselors,'' said Travis Plunkett, legislative director of the Consumer Federation of America. ``There are a number of predatory (counselors) out there.''

Plunkett and other watchdog groups praised the Justice Department's U.S. Trustees for coming up with a list of what it considers legitimate nonprofit credit counselors who must be used by those seeking personal bankruptcy.

The new law, backed by the loan industry and OK'd by Congress in March, requires that any debtor who files for bankruptcy after Oct. 17, 2005, must undergo credit counseling within six months before they file for bankruptcy.

But Chris Barry-Smith, an assitant attorney general in Reilly's office, said his office plans to be "diligent'' in monitoring what happens due to the industry's dubious record.

"A number of states - including Massachusetts - are going to keep a close eye on matters,'' he said.