Personal bankruptcies at new highs as recession hits
January 11, 2002 | Page 8
MATT NICHTER explains why personal debt and bankruptcies have skyrocketed--while credit bosses rake in the profits.
WITH LAYOFFS mounting, the unfolding economic recession is threatening the livelihoods of millions of working people.
Those saddled with debt--mortgages, car payments, college loans or big credit card balances--are especially vulnerable to the shock of sudden unemployment. One missed payment can lead to late fees, jacked-up interest rates and intensified collection efforts--beginning a spiral toward financial ruin.
The government's own statistics show that working people are drowning in debt. According to the U.S. Federal Reserve Bank, outstanding consumer credit doubled during the 1990s.
The anxiety that accompanies growing indebtedness is widely felt. Among households earning between $25,000 and $50,000 a year--roughly the middle of the income ladder in the U.S.--one in eight is "debt poor," devoting more than 40 percent of income to paying off debts. One in 10 of these same households is more than two months late on a payment.
- - - - - - - - - - - - - - - -
WHY ARE so many people in so much debt after 10 straight years of economic expansion--the so-called "miracle" economy that the mainstream media celebrated throughout the 1990s?
Despite low unemployment, constant employment turnover landed people in jobs with reduced pay and health care benefits. Membership in unions shrank, while the number of people with contingent, or temporary, work grew.
As a result, most working-class incomes declined or stagnated--even while corporate profits and the wealth of the richest grew enormously. In order to keep up a decent standard of living, people took on second and third jobs, longer hours--and more debt.
"As the go-go '80s ushered in the austere '90s," explained Robert Manning, author of Credit Card Nation, "banks guided financially beleaguered citizens through the economic minefield of declining real wages, corporate downsizings and skyrocketing college costs with increasingly expensive revolving consumer credit."
"What might have been provided by a more munificent system of unemployment insurance or more generous medical insurance is now provided by Mastercard and Visa," observe Teresa Sullivan, Elizabeth Warren and Jay Westbrook in The Fragile Middle Class: Americans in Debt.
While we're up to our ears in debt, our creditors--especially the credit card companies--are making out like bandits. Though the government's official interest rates have fallen dramatically, credit card interest rates have barely budged--making for fat profits.
"Between 1980 and 1992, the rate at which banks borrow money fell from 13.4 to 3.5 percent," the authors of The Fragile Middle Class explain. "During that same time, the average credit card interest rate rose from 17.3 to 17.8 percent." At the same time, typical late and over-the-limit charges for consumers have tripled since 1994.
"The deregulation of consumer interest rates has made credit card lending more than twice as profitable as all other bank lending," say Sullivan, Warren and Westbrook. "The average 18 percent rate that consumers have been paying would have landed the credit card executives in the penitentiary 20 years ago. Today it lands the same executives in flattering profile stories in Forbes and Business Week."
Removing restrictions from the bankers resulted in the rapid consolidation of the financial industry, which helps to account for the speed with which their practices of gouging customers have spread. "Over the 1990s, industry concentration has proceeded at a breakneck pace," Manning writes. "Today, the top 10 card issuers control 77 percent of the card market."
No wonder the corporate loan sharks mailed out an unbelievable 3.3 billion credit card offers last year--more than 30 for every household in the U.S.
Lacking any alternatives, most of us have taken the bait. Roughly 60 million people in the U.S. have a credit card balance at the end of every month--with the average debt at $11,500.
At 18 percent interest, someone making the minimum required payments on this balance each month would literally die before paying it off. Needless to say, you won't find this spelled out in your credit card membership guide.
- - - - - - - - - - - - - - - -
SO IS Washington looking for ways to rein in the credit industry crooks? Just the opposite. Last year, lawmakers caved in to the industry's demand for tighter personal bankruptcy laws.
Washington politicians justified the harsh "bankruptcy reform" measures by cynically pointing the finger at "rich cheats" who take advantage of the system. The crudest among them railed against the "declining stigma" of filing for bankruptcy.
Of course, no one in Washington raised questions about the loan practices of the "rich cheats" at Chase Manhattan and MBNA. And they didn't make a peep about the massive loopholes in corporate bankruptcy laws.
Laid-off Enron workers are facing financial ruin--both now and for years to come, since their pensions have disappeared. But CEO Kenneth Lay will be relaxing on the beach--since under corporate bankruptcy law, he bears no personal liability for Enron's collapse.
In other words, while there is a "bankruptcy crisis"--a shocking 10 percent of all households in the U.S. experienced a bankruptcy during the 1990s--politicians are cynically blaming the victims.
In fact, personal bankruptcy law is far from lenient. Most applicants either file under Chapter 7, which wipes away credit card and other forms of "unsecured" debt, or Chapter 13, which gives them more time to pay off their loans.
Under Chapter 7, a judge can order someone to sell off valuable assets, including a family's home. Under either code, it becomes extremely difficult to finance future home or car purchases. And certain kinds of debt--like student loans and mortgages--cannot be written off at all. Considerable legal expenses are involved and no small dose of public humiliation.
The main reason that more than 1 million people declare bankruptcy every year is that their debts are simply out of control, despite their best efforts. Some 97 percent of those filing for bankruptcy can "barely meet day-to-day expenses, making debt repayment far out of their reach," according to research by Sullivan, Warren and Westbrook.
The typical bankruptcy filer has a "debt-to-income ratio" of about 2.5 to 1--that is, they have debts worth two-and-a-half times their income. Put another way, if these individuals didn't receive relief under bankruptcy laws, they would have to send their creditors every single penny that they earned for the next 30 months to pay off their debts.
And how do people find themselves caught in a debt trap on this scale? The most commonly cited reason for declaring bankruptcy is sudden job loss. That's why Travis Plunkett of the Consumer Federation of America says, "This is the worst possible time for something like [bankruptcy reform], while people will be suffering the effects of the economy. People are being told, in effect, sink or swim."
We need an alternative to a society where those in power get to lure people into massive debt--and then slam the door shut on any hopes of recovering financially.