We’re all principals in the crime of runaway debt
Bankruptcy reform has come back to bite its most powerful supporters. They should cry us a Hudson River.
The banking industry spent many years and many millions agitating for changes that would eliminate widespread abuse of the U.S. bankruptcy codes, which had remained largely unchanged for decades. Consumers were running wild.
For too many, seeking protection from creditors under Chapter 7 of the old code was a convenient way to clear away the dirty dishes and reset the table for another spending binge. You settled up and moved on, sometimes out of pocket only for legal fees. Also, many Americans casually lived on the cusp of financial catastrophe. The loss of a job or unexpected medical expenses were all that it took to precipitate a crisis.
Many still live on a wing and a credit card.
We’re certainly not savers. In recent months, household spending has grown faster than income. Were it not for the blessing of home equity, the string would have run out for millions of Americans.
But it is also true many banks abused borrowers as much as borrowers abused them. The merest slip in payments on one card could precipitate interest rate increases by every lender. And sometimes it seemed like every lender, even after a bankruptcy filing, was lined up with an offer for more cards, new credit limits, new possibilities for default. Many consumers kept their heads above water by kiting balances from one lender to another, taking advantage of zero-interest incentives, until there was no one else to turn to.
No harm done as far as many banks were concerned. So what if defaults reach 5 percent? Charge 20 percent and laugh all the way to the … You get the idea.
Bankruptcy reform has shifted the balance of power more to the liking of the banks. Many credit card users got into trouble because their minimum monthly payments barely scratched the amount of principal due. The result might be interest payments stretched out so long that they exceeded the principal.
Now, those borrowers must repay at least 1 percent of the principal on their card debt each month, as well as the usual interest and fees. That change may be bankruptcy reform’s best provision.
Except, say Citigroup Inc. and JP Morgan Chase, they expect delinquencies to increase because many customers will not be able to make the new minimum payments. Those with the worst credit — once the marks for another card offering — will be the first to default. The banks will have the option of easing the terms of the loans in order to keep borrowers on the hook, or they will have to eat the debt.
When you have 130 million card customers, as Citigroup does, or 110 million, like JP Morgan, that can be a problem. Banks annually forgive about $40 billion in consumer debt.
The two banks’ disclosures coincide with a new report from the Federal Reserve Bank that consumers continue to ride their plastic for all its worth. More than 46 percent of households now carry card balances, with the median balance at $2,200. Meanwhile, mortgage debt increased 14 percent in 2005, the fourth straight year of double-digit growth.
Personal savings? Off by almost $34 billion in 2005 alone. Household debt ballooned 12 percent, the biggest increase in 20 years. Still, household worth, driven by home values, continued to increase.
The nub of the problem is this: as individuals and as a nation, we have become as casual about debt as an out-of-control gambler tapping a casino credit line.
Our trade deficit reached a record $68.5 billion in January. Collectively, we shop until we drop, as one observer put it.
And the Bush administration’s debt machine last week forced Treasury Secretary John Snow to notify Congress he will be tapping into the federal pension program to fund operations until lawmakers raise the national debt ceiling from an inconceivably lofty $8.2 trillion. Debt service chews up an ever bigger slice of the nation’s income, just as it does for households.
Our savings? All exported.