- The Washington Times - Wednesday, January 19, 2000

Personal bankruptcies posted their biggest one-year drop ever recorded last year as credit-card issuers tightened their criteria, consumers got fewer credit cards, and the economy continued to prosper.
The Consumer Federation of America and a University of Maryland economics professor used bankruptcy and credit-card studies released yesterday as a jumping-off point to protest bankruptcy-restricting legislation that Congress is considering.
Bankruptcies fell 8 percent from 1998 to 1999, the largest one-year decrease ever reported, according to a report by professor Lawrence M. Ausubel. About 1.3 million consumers filed for bankruptcy last year, compared with about 1.4 million the year before.
"The biggest factor is that when bankruptcies started going up in 1995 to 1997, lenders decided they had better tighten their credit standards. So there are fewer offers of credit to people who are right on the brink," Mr. Ausubel said.
Since fewer at-risk consumers are receiving access to credit cards, they are not falling into debt and eventually declaring bankruptcy, he said.
Mr. Ausubel obtained his figures through Sept. 30 from the Administrative Office of the U.S. Courts, which monitors the bankruptcy courts, then added his own estimate to arrive at a year-end number.
"This is not an atypical scenario for a mature financial expansion," said Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va.
The economic expansion will hit a record 107 months in February, surpassing a 1960s boom.
When a financial boom begins, it drives up household spending and debt, leading to a higher rate of bankruptcies because consumers do not know how to manage that debt, Mr. Gerdano said. But as that boom continues with a sustained low interest rate, consumers have the option to switch to low-interest credit cards.
But are consumers actually spending smarter?
That's tough to measure, analysts say.
"People may be learning something, too; that's harder to document," Mr. Ausubel said.
The Consumer Federation of America co-released a report about credit-card issuers with the professor's report, and used the two studies as evidence that Congress should not pass a bankruptcy bill.
The Senate is scheduled to resume debate next week on major legislation, pushed by credit-card companies and retailers, that would make it tougher for people to erase their debts in bankruptcy court. The House approved parallel legislation in May.
The federation report found that credit-card issuers have cut back on direct-mail marketing efforts, discouraged by consumers' decreasing response rates to solicitations.
A projected 3.1 billion credit-card offers were mailed last year, down from 3.5 billion in 1998, according to figures from BAI Global, a New York market research firm.
The federation, a District-based consumer advocacy group, also said that credit-card issuers are giving out fewer cards. That has helped to decrease bankruptcy, said Travis Plunkett, the group's legislative director.
"It's the explosion of credit-card debt that we see having the most effect on bankruptcy," he said.
Mr. Ausubel and Mr. Plunkett said Congress should not restrict the requirements for bankruptcy.
"Just as Congress has been considering the bankruptcy bill, the problem has been correcting itself," Mr. Ausubel said. Credit-card issuers, which currently cannot recover debt when credit-card holders declare bankruptcy, ratcheted back efforts to lure at-risk consumers, he said.
If Congress passed bankruptcy legislation, it would improve lenders' chances of recovering their money, so they would redouble efforts to target borderline credit risks, Mr. Ausubel said.
"This is a self-correcting crisis. You harm the market and you harm consumers if you intervene," Mr. Plunkett said.
Mr. Gerdano and Joanne Kerstetter, president of Consumer Credit Counseling Service of Greater Washington, said 1.3 million bankrupt individuals is still high.
"You can't ignore the fact that bankruptcies are still high in historical terms… . That statistic converts to people who are in financial crisis," Ms. Kerstetter said.
Patricia Boerger, a spokeswoman for the American Bankers Association, said there's no guarantee the decreasing bankruptcy trend will continue.
"The reality is that the current bankruptcy [law] is broken," she said. "It allows people who can afford to pay their debts to walk away."
As a result, she said, credit-card lenders are forced to raise rates for responsible consumers, costing households an average $400 a year.

This article is based in part on wire service reports.

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