Ask Auntie Pinko

March 10, 2005
By Auntie Pinko

Dear Auntie Pinko,

I manage my money carefully and use credit cards wisely. I'm not rich, I make less than $40,000 a year, but I manage to save at least $4,000 a year in IRAs and a regular savings account. I don't buy things I don't need and my kids don't wear designer sport shoes. I don't see why responsible people should have to bear the burden for irresponsible people who overspend their income and can't say "no" to their kids. What's wrong with bankruptcy reform? Shouldn't people have to pay the price for their own irresponsibility?

Keith,
Tulsa, OK

Dear Keith,

Congratulations on your sound family financial management. Auntie hates to bring this up, but a great many people who declared bankruptcy last year are just like you.

The only difference is that, at some point, something entirely beyond their control (catastrophic illness or job loss) happened in their lives, and even those who had health insurance and/or savings accounts were unable to continue making mortgage or rent payments, paying utilities, car payments and/or insurance, health insurance premiums, taxes, student loan payments, and other expenses outside their ability to cost-control.

The Consumer Bankruptcy Project at Harvard University has been studying bankruptcy for fifteen years. It may surprise you to learn that only 4.3% of the consumer bankruptcies filed in 2001 were because of credit card debt. Some other interesting facts:

• Over 90% of those filing for bankruptcy in the year that ended 6/30/03 were middle class families and individuals.
  
  
• The number of senior citizens filing for bankruptcy increased 244% percent between 1991 and 2001.
  
  
• In 1971, the average one-income family spent 54% of their income on "non-discretionary" costs like taxes, mortgage, health insurance, car payments, etc. In 2001, an average family with two incomes spent 75% of their income on non-discretionary costs. Families are working harder, and still have less control over their money, and less margin for savings.
  
  
• About half of the bankruptcy filers experienced "medical bankruptcy" (that is, bankruptcy related to health care costs) and of those, more than 75% had health insurance at the onset of illness.

Some ask why so many people rely on credit card debt as their emergency safety net, and why they have so much trouble managing even "necessary" credit card debt. It might be enlightening to note that according to an FDIC study, the dramatic rise in bankruptcy rates is directly linked to banking deregulation, which has allowed the credit industry to engage in unrestricted predatory and exploitive lending practices.

Deregulation has allowed the credit card industry to employ sophisticated marketing to prey on financially vulnerable users. The aim of the credit card companies is to acquire users who will maintain high balances, make minimum monthly payments and pay hundreds (or thousands) of dollars in interest. Without regulatory standards in place to limit interest rates and establish standards for credit-worthiness, credit card companies are free to dispense multiple high-interest cards to high-risk individuals.

In other words, it is the credit industry's own business practices that promote the massive growth of consumer debt. And their response to higher levels of default and bankruptcy has not been to be more responsible in their lending practices, but to become more predatory, raising interest rates arbitrarily, instituting high fees for an increasing range of reasons, and issuing even more credit cards at even higher risk of default. Using these tactics, the credit card industry has not just maintained, but increased its profitability even as bankruptcy and default rates have soared.

If there's irresponsibility involved here, Keith, Auntie would have to say that the impact of the credit card industry's rapacious practices is far, far larger than the impact of the 4.3% of filers whose bankruptcy can be traced solely to credit card overspending.

Anyone who wants to check the figures quoted here is free to Google Consumer Bankruptcy Project and FDIC bankruptcy study. There's a lot of interesting information out there on the Internet, and I'm sure your time won't be wasted. Thanks for asking Auntie Pinko!

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