Credit Card Lenders Seek Bankruptcy Reform

Credit card lenders are asking for a little help from Congress in staunching losses from bankrupt customers.

American Express Co., Mastercard International Inc., Visa International Inc. and other industry participants want lawmakers to create a new test that would gauge consumers’ ability to repay their obligations when they file for bankruptcy. U.S. bankruptcy law doesn’t currently have a comprehensive income test.

Companies want “a legislative line in the sand that says if you can make substantial repayments, you will make substantial repayments,” said Philip Corwin, a lawyer at Federal Legislative Associates, who represented the credit card industry before a hearing by the Bankruptcy Review Commission.

Card issuers say it’s too easy for individuals to file for bankruptcy. They’re particularly concerned about the proliferation of Chapter 7 filings, which permit petitioners to completely avoid repaying debts.

Rising late payments and credit card losses have become a thorn in the side of banks and other finance companies, who have otherwise found the credit card business to be highly profitable. Delinquencies increased in the second quarter to 3.66 percent from 3.53 percent in the first quarter. The new figure is the highest percentage since the American Bankers Association began reporting the figure.

Many banks have slowed their credit card marketing and even sold off riskier parts of their portfolios as a result of the rising losses. Almost all the institutions have cracked down by raising fees on customers who exceed their credit limits or pay late.

Many big companies have been hurt by consumers who can’t pay their bills. AT&T, for example, reported a $35 million operating loss at its Universal credit card unit in the fourth quarter. Bank of New York Co. added $350 million to its reserves for credit card losses in the second quarter, and First Chicago NBD Corp. has written off increasing credit card losses.

Still, few are getting out of the business. There are few other areas in which banks can lend money that they borrow at a cost of about 6 percent to consumers at annual rates as high as 18 percent or even 20 percent.

The Bankruptcy Review Commission, created last time the bankruptcy law was changed in 1994, plans to send Congress recommendations on how to revise the U.S. bankruptcy system next October. Then Congress will begin debating proposed legislation in 1998, Corwin said.