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CONSUMERS PAY FOR CREDIT-CARD DEBT

The numbers are scary.

During the first two weeks of May, 324 people filed personal bankruptcies in Buffalo. Collectively, they asked the court to excuse them from $18.2 million in debts, including $6.2 million in credit-card debts.

If those numbers are typical -- and court officials believe they are -- bankruptcy filers in Buffalo could be excused from up to $473 million in debts this year, including $134 million from credit cards alone. And Buffalo, which serves eight local counties, is just one of 93 bankruptcy courts throughout the country.

Nationwide, Americans charged $1 trillion on credit cards in 1996. This year, they will use bankruptcy to blow off billions of dollars in credit-card debts.

Somebody pays for all this: You.

Those who pay their bills wind up paying off the debts for those who don't. How much does it cost?

Kenneth Crone, senior vice president of the Visa USA credit-card company, estimates consumers absorbed more than $30 billion in bankruptcy-related costs in 1996.

"When somebody files a bankruptcy, his debt doesn't just disappear in the sky. It has to be absorbed somehow," said Stanton Warren, an economics professor at Niagara University. "One way or another, it generally gets passed on to consumers."

Some of the ways the debts are absorbed:

Department store chains and other businesses that lose big money from customers who go bankrupt sometimes have to raise prices on their products. Some companies have even been forced to go out of business themselves -- putting their employees out of work -- because of their customers' bankruptcies.

Banks have raised credit-card interest rates to extreme levels, some
times close to 20 percent. The large number of consumer delinquencies and bankruptcies is one of the main rationales for this increase.

When banks' profits are cut by credit-card delinquencies, it also can show up in higher mortgage interest rates, or lower interest rates on savings accounts.

"In some cases, a bank might lay off its work force and provide less service to their customers because the delinquencies cut into their profits," Warren said. "One thing that you can be pretty sure of is that the top bank executives are not going to sit around and say, 'We lost some money on some credit cards, so let's all take pay cuts.' "

Edwin Ilardo, a bankruptcy trustee and attorney here since the 1950s, said he is convinced that banks "love it" when people get in over their heads with credit cards.

"If you can't pay, they keep raising your spending limit," Ilardo said. "And if you never pay, they just write off your loss and pass the expense on to the consumer who does pay his bills. . . . The banks are making money hand over fist on these things."

Banks make a healthy profit on credit cards, but it's ridiculous to suggest that bankers are pleased when people don't pay their bills, said James H. Chessen, chief economist for the American Bankers Association.

"It doesn't do a bank any good to put money in the hands of people who can't handle it," Chessen said. "If somebody goes bankrupt, it's an immediate loss to that (banking) institution. And it's expensive."

Why do banks keep giving credit cards to people like Mary and Larry Wolniewicz of Clarence Center, who recently went to Bankruptcy Court trying to erase a credit debt of nearly $340,000?

First of all, Chessen said, he was astonished to hear about the local couple's debt -- calling it the largest of its kind he has ever heard about in any city. But he added that determining why they got so many credit cards is difficult, because every bank that issues cards has its own policies.

"There are 7,000 credit-card issuers in this country, primarily banks, but also including some retailers. Each of them determines their own policies on risk," Chessen said.

Each bank sets aside a "reserve" fund to cover losses when customers fail to pay back a credit card debt or loan. But at the same time, portions of the cost related to delinquencies are passed on to consumers, Chessen acknowledged.

"The rest of us ultimately end up paying for the losses," Chessen said. "We all end up paying for the excesses, extravagances and abuses of people who abuse their credit cards."

Lenders have to be more careful about who gets cards. But aside from that, the big spenders have to remember that paying off credit cards is a matter of personal responsibility, Chessen said.

"When somebody takes out a loan or a credit card, this is an obligation to pay off," Chessen said. "To run up a big bill and say, 'It's just a bank, they make lots of money,' is fraudulent."

Bankers and retailers feel it has become too easy to file bankruptcies and abuse the system, and those factors have also contributed to the bankruptcy explosion, Chessen said.

Bankers hope a study by the National Bankruptcy Review Commission will lead to changes in federal law, making it harder for debtors to abuse the system and easier for creditors to collect money they are owed. The commission, set up by Congress three years ago, is scheduled to issue a report Monday..

Many bankers and business owners want the system to crack down harder on fraud and to require debtors to pay back larger portions of what they owe. One proposal calls for the U.S. Bankruptcy Trustee's office to conduct random audits on debtors.

Some bankers have proposed eliminating Chapter 7 bankruptcies for individual debtors and requiring all individual debtors to file Chapter 13. Under Chapter 7, a debtor walks away from his or her entire debt. Under Chapter 13, the debtor is required to set up a plan to pay at least a portion of the debt.

"The law is broken and it needs to be fixed," Chessen said.

Another suggestion would require all personal bankruptcy filers to take courses on personal finance and keep a budget. Fred G. Floss, associate professor of finance at Buffalo State College, is a strong supporter of that one.

"It's amazing how many people have never been taught anything about personal finance," Floss said. "Very few people actually sit down and ask themselves, 'How much money do I have? How much am I spending, how much can I afford to spend?' Very few of us understand how the interest on a credit card can get out of hand."

Personal bankruptcies went over 1 million for the first time in 1996 and are expected to reach 1.3 million this year. Some experts are predicting 3 million Americans a year will be filing a decade from now.

"I keep hearing in the news media that the U.S. economy is great, but then I look at our caseload," said a clerk in the Buffalo Bankruptcy Court. "I keep asking myself, 'Who says the economy is doing so great?' "

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