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ECONOMICS -
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Universal default forces many into bankruptcy

Posted in the database on Saturday, March 25th, 2006 @ 19:39:50 MST (1561 views)
by Adam Townsend    The Intelligencer  

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Tom, a Wellsburg resident, was doing all right financially. He had a few credit card bills, but who doesn’t? Tom never missed a payment, and he continued to pay down his debt.

Recently, however, one of the four companies with which Tom had a credit account decided he wasn’t paying enough interest.

“It all started with one credit card,” he said.

“They said they had the right to go in and check my score. I was paying $130 a month, and the next month they wanted me to pay $300.”

The credit card company additionally raised Tom’s interest rate from 9 percent to 35 percent. Once the company did this, its representatives decided to also retroactively reduce his credit limit.

Tom had an $8,500 credit limit when he made purchases with the card. But the creditor decided to reduce that limit to $6,500 — two years after Tom made his original purchase.

When the creditor added retroactive finance charges and the 24 percent rate increase to Tom’s bill, his total debt to the company was over the new $6,500 limit. As a result, over-limit fees were added to his tally.

And once Tom’s three other creditors saw all the negatives in his credit score from the first card, they instituted their own array of rate hikes and penalties, though Tom had never made a late payment to any of them.

“I don’t understand how anything like this could be legal,” Tom said.

“If it’s going to take filing for bankruptcy, I’ll file for bankruptcy. I don’t see how there’s anything constitutional about that. I’m just taking a stand. I think it’s wrong.”

Nancy, a Hammondsville resident who always considered herself in good financial standing, decided to take advantage of a promotional program offered by her credit card company to pay down some debt.

Her credit card issuer started sending her checks, which the company said she could use to pay off debt at a lower interest rate than she had been paying.

“I was in debt, but I could make all my payments,” Nancy said.

“Right after Christmas they jacked my payment up to 300 bucks. They took and raised all those interest rates to 30 percent. I didn’t charge a thing all Christmas.”

Like Tom, Nancy has been consulting with a bankruptcy attorney. She said creditors were constantly calling her house.

“They’ve been pestering me every half-hour,” Nancy said.

“They’re plaguing me to death. I’ll be 66 and I’ve never asked my kids for a penny — and I don’t intend to.”

The problems Tom and Nancy are facing — who both asked that their names be changed to keep their personal financial issues private — are all too common to Steubenville bankruptcy attorney Roger Isla.

“You end up basically being an indentured servant to your credit card company,” Isla said.

“The marketing that credit card companies are doing is unconscionable.”

Isla said companies often offer interest rates as low as 2 percent to those with mediocre or bad credit scores.

In the fine print of these pre-approved agreements is a clause that states the creditor reserves the right to change the interest rate — often advertised as “fixed” — at any time for any reason.

Two U.S. Supreme Court cases and some state legislation have allowed the spread of “universal default,” or retroactive interest rate hiking.

To become competitive centers for corporate banking, first South Dakota and then Delaware removed their “usury ceilings” about 25 years ago. Usury laws are state legislation designed to prevent lenders from charging exorbitant or usurious interest rates on loans and credit.

Because Delaware and South Dakota got rid of such laws, creditors who incorporate in these states can export the state’s interest rate, meaning the lenders can set the rates at whatever they want.

Furthermore, a Supreme Court ruling in the late 1970s stated it was OK for a Nebraska creditor to export higher rates to Minnesota.

Another ruling on another case said that creditors also were allowed to export late payment fees. Both rulings established precedents for current credit practices.

In an effort to curb out-of-control credit lending, the U.S. Comptroller of the Currency, the office responsible for regulating the industry, has mandated a doubling of the minimum payment debtors must make each month on their credit cards.

Most creditors put the increases into effect in January.

In the long run, Isla said, this is a good thing.

More debtors will be less tempted to spend beyond their means and will pay off debts more quickly. In the meantime, however, Isla said he’s seen a spike in clients whose finances can’t handle their payments’ doubling.

“We started seeing a big influx of people about three weeks ago,” he said Friday.

_______________________

Personal Bankruptcy Filings Up 30 Pct.

Associated Press
http://news.yahoo.com/s/ap/bankruptcy_surge_yourmoney

Personal bankruptcies soared 30 percent to a record high last year, surpassing 2 million for the first time, as financially strained people rushed to file before new restrictions took effect Oct. 17.

Bankruptcy petitions filed in federal courts totaled 2,039,214 in 2005, up from 1,563,145 in 2004, according to data released Friday by the Administrative Office of the U.S. Courts.

A new law, which brought the most comprehensive revision of the U.S. Bankruptcy Code in a quarter-century, made it more difficult to erase credit card and other debts in bankruptcy. Prior to its enactment, the number of bankruptcy filings had been fairly stable.

"It is ironic that, at least in the short term, a law Congress hoped would reduce bankruptcies instead caused the largest upward spike in history," said Samuel Gerdano, executive director of the American Bankruptcy Institute, an organization of bankruptcy judges, lawyers and other experts.

By contrast, he said, personal bankruptcy filings have fallen sharply so far this year under the impetus of the more stringent law.

The law bars those with above-average income from Chapter 7 — where debts can be wiped out entirely — except under special circumstances. Those deemed by a new "means test" to have at least $100 a month left over after paying certain debts and expenses must file instead a 5-year repayment plan under the more restrictive Chapter 13.

The new figures showed that last year there were 1,631,011 personal bankruptcy filings under Chapter 7, up from 1,117,766 in 2004. Chapter 13 filings declined to 407,322 from 444,428.

In the final quarter of the year, which included the two weeks preceding the Oct. 17 deadline, filings under Chapter 7 ballooned to 560,654 from 254,518 in the October-December period of 2004. Chapter 13 filings fell to 93,714 from 109,116.

A group representing bankruptcy attorneys has contended, in a report released last month, that the law has failed to stop abuses and has stymied people who have legitimate reasons to file for bankruptcy.

The report by the National Association of Consumer Bankruptcy Attorneys was based on an analysis of 61,335 people who had gone to credit counseling agencies, the required first step under the new law before filing bankruptcy. Of the 61,335, 97 percent were unable to repay any debts and 79 percent had gotten into financial trouble because of job loss, huge medical expenses or the death of a spouse, the report said.

Passage of the new bankruptcy law came after eight years of strenuous efforts by congressional backers, banks and credit card companies. Supporters said the new provisions were needed to curb abuses of the bankruptcy system. Opponents said the changes would be especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face mounting medical bills.



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