Prof Argues Card Issuers Like Bankrupt Consumers

Why do credit card issuers aggressively send out solicitation letters to consumers that have declared bankruptcy? The flip answer is because they can. But the deeper answer is because these consumers have proven profitable to the issuers and probably will be again, Katherine M. Porter, author of the recently released study "Bankrupt Profits: The Credit Industry’s Business Model for Postbankruptcy Lending” told insideARM.com.

Porter found that credit card issuers send more than twice as many card offers per month to consumers exiting Chapter 7 bankruptcy than to average Americans.

Porter, an associate professor at the University of Iowa and a principal investigator for the Consumer Bankruptcy Project, said that issuers size up these bankrupt consumers and find a lot to like. They have proven themselves eager credit card users and they want a card as they exit from bankruptcy when most or all of their cards have been cancelled, she noted. Further, these are consumers that probably carried a balance on their account, thus paying interest every month to the issuer. Finally, bankruptcy laws forbid the consumers from filing again for several years so they will be paying at least the monthly minimum on their account.

Issuers make their decisions on the basis of profit and loss and these are profitable credit card consumers, she said.

“If these issuers were losing so much money they would have cut lending to these [troubled] consumers,” said Porter. “Creditors are more strategic and rational. They have more data than consumers do.”

The study interviewed families at the one-year and three-year mark after emerging from bankruptcy. Porter found that nearly all the families had been offered new credit cards within a year after completing Chapter 7 bankruptcy. Of 341 families, nearly 88 percent received letters that mentioned their bankruptcy status. Twenty percent received solicitation letters from card issuers they had failed to pay as they went through the bankruptcy process.

Card issuers were successful in lobbying Congress to pass tougher bankruptcy filing requirements in the federal bankruptcy law enacted in October of 2005. Issuers argued that the stricter standards were needed to stop consumers that maxed out on their cards, then declared bankruptcy and wrote off their debts, according to Porter.

The study findings are counter to the issuers’ arguments, said Porter. Congress didn’t look hard enough at the behavior of credit grantors and instead focused on consumers, she said.

“We should be more aware of the effect of credit granting. Why are so many people in so much debt?” said Porter. “If Congress thinks we have too many consumers in distress­­–they should put some constraints on credit practices.”