Credit Cards: Fight for Bankruptcy Law Reform Masks Truth

The National Bankruptcy Review Commission will make its recommendations on possible bankruptcy reform October 20, and credit card issuers, which saw defaults reach unequaled heights in 1996, are urging they get stronger hands after a citizen files for Chapter 13.

The issuers certainly have cause for complaint; at year end, bank card delinquencies totaled 5.45 percent of total dollars outstanding, according to the American Banker's Association. This amounted to $26.42 billion in delinquent accounts, according to figures supplied by the Federal Reserve's G-19 release on revolving credit amounts, about one percent of which would wind up under Chapter 13 protection. These figures have been creeping upwards since mid-1994, when 2.9 percent of total dollars outstanding, or $9.68 billion, were delinquent.

The results for issuers once a consumer filed were usually dismal, since by definition filers couldn't repay their loans. The argument put forward by issuers has been that many of these filings are conveniences and accounting fictions that often leave filers mostly intact, and the issuers' stockholders weeping. And under current bankruptcy law, debtors can avoid paying many debts for considerable periods.

But, counter observers, credit card issuers have highly automated operations replete with credit scoring and behavioral models, designed to weed out those most likely to default or file for bankruptcy before cards are issued. Furthermore, card balances are followed monthly, allowing plenty of time for red flags to blossom all over likely bankrupt parties in time to close the accounts.

Looked at this way, issuers' arguments look more like someone who owns a car and knows it has bad brakes; if they have an accident, they're liable since they didn't take corrective action. Likewise, sources say, card issuers should take responsibility for their informed actions, since they have tools that indicate with whom default and possible bankruptcy are likely.

The proof, they say, is that bankruptcy rates could have been worse. In August, Fair, Isaac & Co. released a new bankruptcy predictor, called Horizon, that it says can eliminate 54 percent of bankruptcies by weeding out potential deadbeats from the bottom 10 percent of a card-holding population, compared with 36 percent for its Empirica bank card product. "Had (issuers) not been using (the technology), bankruptcies probably would have been worse," says Sally Taylor-Shoff, Fair, Isaac's business manager for credit bureau risk scores. "(But issuers) did have a tool" to manage risk.

reinbach tfn.com