Bankruptcy, surprisingly, is not the end of credit

Most people rightly view a filing of bankruptcy as a last resort for those in financial trouble. And it should be a last resort. It’s expensive, time consuming, and complicated. It leaves a mark on your credit report for ten years. And thanks to the passage of some new Federal legislation, it won’t even do away with all of a consumer’s debts. Plus, it has often been said, a bankruptcy filing will make it difficult, if not impossible, to obtain credit again any time soon.

So why do many people who have just emerged from bankruptcy proceedings find their mailboxes full of pre-approved offers for credit cards?

It may come as a surprise, especially for filers who have been told not to expect any credit anytime soon. But more and more filers are discovering that the credit card offers are as numerous, or even more so, than they were before. The reasons are simple - the new bankruptcy legislation makes it impossible for anyone who has recently filed for debt relief to have his or her debts wiped out again by the courts for another eight years. Any debt incurred during that time must be repaid, no matter what. So the card issuing companies figure that anyone who accepts a credit card under such terms will not be able to walk away from any debts incurred on the new account. Plus, a customer who has just had his or her debts wiped away is now likely to start spending again.

This isn’t a gift from the banks that issue these cards - they stand to make money on these new accounts, and lots of it. The debtor’s mailbox may be full of credit card offers, but they are not good credit card offers. You won’t find any cards with 10% interest in there; they will all be subprime cards with hefty, if no exorbitant, interest rates that probably fall on the far side of 20%. In fact, they may run closer to 30% and have high late fees and annual fees, as well.

Furthermore, the banks that issue these cards are actually counting on the cardholder carrying a balance from month to month and paying the occasional late bill. These things are welcome because they are hugely profitable. Sure, there will be some losses from deadbeats who simply do not pay, but for the most part, it’s easy money.  $39 late fees and 25% interest make for a pretty good living for a lender, especially if the alternative is lending money for home loans at 6.5%.

That said, anyone who has just emerged from bankruptcy court should be cautious about opening new accounts. In all likelihood, the conditions that got the consumer into financial trouble in the first place are still present, and someone who has a history of debt management problems will probably still be prone to the same mistakes.  To any such debtors who find their mailboxes full of such offers, we suggest this reminder - the banks aren’t doing it for you.

Copyright © 2005-2007 by Retro Marketing. All rights reserved.