"The widespread efforts of creditors to lure bankrupt families into new borrowing relationships stand in stark contrast to the credit industry's portrayal of these families' propensity for honoring their obligations."
- Katherine Porter
During a decade of debate, the credit industry successfully kept the bankruptcy reform focus on debtor behavior, and the result, as we know all too well, was a new bankruptcy law that heavily favored creditors and created new obstacles and expenses for debtors.
The rationale was simple: most of these debtors were deadbeats who took advantage of the system by running up debt irresponsibly and then using bankruptcy to avoid their obligations. A new post-bankruptcy studyby Katherine Porter, Associate Professor of Law at the University of Iowa, seems to give lie to the credit industry's representations.
Porter's study reveals two paradoxes that call into question all of the credit industry rhetoric about unreliable debtors and the need to protect lenders from the risks associated with those "unscrupulous" borrowers. First, post-bankruptcy debtors reported greater difficulty in obtaining secured credit than unsecured credit, though secured credit is theoretically safer for the lender.
Second, and even more telling, those debtors who chose to file for Chapter 13 bankruptcy and pay some or all of their outstanding debts through that process have fewer credit opportunities than those who discharged their debt through Chapter 7!
Porter's conclusion highlights the disconnect between the credit industry's words and its actions: "Despite their disparagement of the character of bankrupt families, lenders actively solicit them as future customers. This empirical evidence suggests that the credit industry takes one view of bankruptcy debtors to Congress, the media, and public, but itself literally 'banks' on a different view of bankruptcy debtors."
Porter also revealed that:
- Nearly all debtors reported receiving offers of credit in the first months after bankruptcy;
- 96.1% of debtors received credit solicitations within one year after bankruptcy;
- Only about 25% of those debtors receiving credit solicitations in the year after bankruptcy accepted them;
- One year after bankruptcy, families reported receiving an average of 14 credit solicitations per month;
- Non-bankrupt households receive, on average, only about 1/3 as many credit solicitations as post-bankruptcy households.
- Lest we think that perhaps lenders are simply sloppy in sending out their solicitations or casting the net too wide, Porter points out that nearly 88% of debtors reported that lenders had specifically referred to the debtor's bankruptcy in their solicitations.
The fact that lenders target the financially vulnerable comes as no surprise to consumer bankruptcy attorneys, but Porter's study-the first longitudinal post-bankruptcy study of its kind-provides hard data that's difficult to ignore or explain away. Perhaps this data will help shift the focus of the bankruptcy debate away from debtor behavior alone and toward a view that considers the business models and contributory behaviors of the credit industry itself in light of its actions rather than just its rhetoric.