Responsible Consumers Driven into Default

FOR IMMEDIATE RELEASE
February 22, 2005  
CONTACT: John Rao
(671) 542-8010
jrao@nclc.org

Credit Card Industry Shares Responsibility for Bankruptcy Filings – But Proposed Legislation Lets Them Off Scot-Free.

Credit card companies and their legislative supporters talk about irresponsible consumers running up debt and then filing bankruptcy. Senator Charles Grassley (IA) who introduced the bankruptcy bill this year stated that “it's time to promote responsible borrowing,” noting that bankruptcy “was not intended to be a convenient financial planning tool where deadbeats can get out of paying their debt scot-free while honest Americans who play by the rules have to foot the bill.” The following tells a much different story and explains why credit card companies continue to have record profits, and how they can make a profit even on someone who later files bankruptcy. It is a story about a consumer from Cleveland, Ohio who is not a deadbeat, who did play by the rules, but got driven hopelessly into default by her credit card company.

Six-Year Struggle to Repay Debt – A Story of Unending Fees

In May 1997, Ruth Owens stopped using her credit card, made no further purchases or cash advances, and tried to pay off her debt to Discover Bank. At that time, she owed $1,963. Over the next six years, Ms. Owens made $3,492 in payments to Discover Bank. One might assume this was enough to pay off her debt. After all, if Ms. Owens had made the same payments on a $2,000 loan with interest at 21% annual percentage rate (the usury limit in many states), her debt would be paid off. Let’s see what happened to Ms. Owens and her payments.

From May 1997 until her account was sent for collection in May 2003, not one penny of Ms. Owens $3,492 in payments went to reduce her debt. During this time, Discover Bank charged Ms. Owens various fees that sucked up all of her payments and caused her debt to grow even larger. The following fees and interest were charged to Ms. Owens’ account:

So despite having received substantial payments for six years from Ms. Owens (all that she could really afford), Discover Bank claimed that she still owed $5,564 when they filed a collection lawsuit against her in an Ohio court.

After having paid $3,492 on a $1,963 debt, Ms. Owens balance grew to $5,564.

Card companies like Discover Bank make huge profits off customers like Ms. Owens. Rather than work with these consumers to reduce their debt by curbing the excess fees and interest, card companies prefer to get as much out of consumers for as long as possible until they eventually stop paying or file bankruptcy.

In this case, Ms. Owens would have been far better off if she simply stopped paying Discover Bank years earlier and had them sue her in state court. If Discover Bank had gotten a court judgment for $2,000, all of the card fees and high-rate interest would have stopped and Discover would have then been entitled to 10% or less interest per year under Ohio law. Rather than have her debt increase, Ms. Owens’ payments would have paid off the debt in full in approximately 4 years.

When Discover Card sued Ms. Owens in state court, she submitted the following handwritten statement to the court:

“I would like to inform you that I have no money to make payments. I am on Social Security Disability. After paying my monthly utilities, there is no money left except little food money and sometimes it isn't enough. If my situation was different I would pay. I just don't have it. I'm sorry.”

The Ohio judge assigned to the collection case rightly found that Ms. Owens was not a deadbeat. He stated that her “instincts were always that she wanted to plug away at meeting her financial obligations. While clearly placing her on the moral high road, that same highway unfortunately was her road to financial ruin. How is it that the person who wants to do right ends up so worse off? It is plain to the court that the creditor also bears some responsibility.”2

In barring Discover Card from collecting any more money from Ms. Owens, the Ohio judge stated: “This court is all too aware of the widespread financial exploitation of the urban poor by overbearing credit-card companies. [Ms. Owens] has clearly been the victim of plaintiff's unreasonable, unconscionable and unjust business practices.”

Bankruptcy “Losses” are NOT Being Passed on to Other Better Off Consumers

The majority of consumers file bankruptcy as a last resort. By the time they do file bankruptcy, their pre-bankruptcy payments have been diverted away from paying off their charge balances for so long, after being loaded up with interest and fees over many months, that it is hard to imagine card companies have any discernible losses to pass on to other consumers.

Last year, a bankruptcy court in North Carolina ordered a credit card company to itemize the claims it files in chapter 13 bankruptcy cases.3 In its findings in support of the Order, the bankruptcy judge listed claims filed in eighteen separate cases broken down as between principal and interest and fees. On average, interest and fees consisted of more than half (57%) of the total amounts listed in the claims. In one case (No. 03-20018), the card company filed a claim in the amount of $943.58, of which $199.63 was listed as principal and $743.95 was listed as interest and fees. In another case (No. 03-100157), a claim of $1,011.97 consisted of $273.33 in principal and $738.64 in interest and fees. It is almost certain that pre-bankruptcy payments in these cases had more than paid off the real charges made by the consumers.

A bankruptcy case from Virginia tells the story of another consumer’s efforts to avoid bankruptcy.4 During the two year period before she filed bankruptcy, the consumer made only $218.16 in new charges on her Providian Visa. After making $3,058 in payments, all of which went to pay finance charges (at the rate of 29.99%), late charges, overlimit fees, bad check fees, and phone payment fees, the balance on her account increased from $4,888 to $5,357. On her Providian Mastercard for the same period, she made only $203.06 in purchases while making $2,008 in payments. Again, all of her payments went to pay finance and other charges, and her account balance increased from $2,020.90 to $2,607.66.

There is a great deal of misinformation circulating about the increase in bankruptcy filings and purported abuses in the system. The reality is that more debtors use the bankruptcy system because more debtors are having serious financial problems, and because more American families are having trouble paying their debts. The proposed bankruptcy legislation does nothing to penalize creditors whose actions push people into bankruptcy. Legislative action to change the bankruptcy system must require honesty and fair dealing not just on the part of debtors, but also by creditors.

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1 Like many card customers, Ms. Owens was being charged for one of the numerous insurance-like products sold by card companies. Often, these products are sold through high-pressure telemarketing sales. In this case, Ms. Owens was charged approximately $10 per month for a Discover card product called CreditSafe Plus, which apparently provided for a suspension of payments and finance charges if Ms. Owens became unemployed, hospitalized, or disabled. Since Ms. Owens was already on Social Security Disability and unemployed, the CreditSafe product presumably would apply only if she became hospitalized. Ms. Owens was no doubt paying for a product that would likely never benefit her.
2 Discover Bank v. Owens, --- N.E.2d ----, 2004 WL 2168385 (Ohio Mun. Sep 09, 2004).
3 In re Blair, No. 02-1140 (Bankr. W.D.N.C. filed Feb. 10, 2004)
4 In re McCarthy, No. 04-10493-SSM (Bankr. E.D. Va. filed July 14, 2004).