US card issuers eye unlikely group: new bankrupts
Bankrupt? Want a credit card? You're golden.
A record number of Americans filed to wipe out their debts this year ahead of the autumn implementation of a tough new bankruptcy law. That surge in filings forced U.S. credit-card issuers like Citigroup (C.N: Quote, Profile, Research) and Capital One Financial (COF.N: Quote, Profile, Research) to report a huge jump in uncollectable debts in the third quarter and to warn the losses would bleed into the fourth quarter.
The bankruptcy bubble has forced the card issuers to set aside big amounts to cover the unprecedented surge in charge-offs. It's also forcing them to scramble to rebuild their diminished loan portfolios, which are already under stress because of new federal guidelines on minimum payments requirements that are cutting into receivables and interest income, according to analysts at Citigroup Global Markets.
As they consider their options, some in the industry are reportedly mulling a strategy that concerns consumer advocates -- signing up the consumers who just had their debts discharged.
Sound crazy? It's not. For starters, the new bankruptcy law requires debtors to come up with a payment plan to satisfy unsecured creditors like the card companies. So the newly bankrupt are actually pretty good credit risks. But that's not all. In a world where the average creditworthy American already has more than four general-purpose credit cards and where response rates to direct-mail solicitations touting zero-interest teaser rates have fallen below 1 percent, experts say the newly bankrupt have much to recommend them.
Among their attractions: a tendency to engage in behaviors that generate hefty finance and penalty fees and bring fat profits to the issuers.
"The credit-card companies can't afford to lose these people," said Robert D. Manning, a professor at the Rochester Institute of Technology and author of the book "Credit Card Nation." "They've really come to count on them."
UNTOUCHABLE NO MORE
According to Lundquist Consulting Inc. of Burlingame, California, nearly 2 million Americans filed for bankruptcy from Jan. 1 until the Oct. 17 implementation of the new law, up nearly 52 percent from the same time last year.
In the old days, burned card issuers would have treated the people behind those sour statistics like untouchables and either denied them credit for up to seven years -- or steered them into secured cards. No more.
"Lenders are going to go after them again and offer them money," Capital One Vice President Mike Rowen told listeners at a recent "State of the U.S. Consumer" conference hosted by CIBC World Markets.
During the conference, Rowen checked off for his listeners the things that make the newly bankrupt so attractive to some lenders.
For starters, they are debt-free, which means they're in a much better position than the average U.S. consumer to pay off any new bills in the face of rising interest rates, higher fuel prices and a slowdown in the real-estate market.
What's more, Rowen said, because the new U.S. bankruptcy law that went into effect in mid-October forbids anyone who declares bankruptcy from doing so again for anywhere between two to eight years, the newly bankrupt are customers who will -- by law -- have to pay a substantial portion of their new debts.
"The people that get discharged are going to get access to credit right away," Rowen said, "because once they're discharged, you know, they can't file for bankruptcy for a long time again."
The newly bankrupt are also card-free and keen to re-establish credit, making them much easier marks for direct-mail solicitations than their overcarded, nonbankrupt peers. And because they're so grateful to get their mitts on plastic again, the newly bankrupt will swallow the punishingly high interest rates that the credit-card companies will charge them because of their so-called "subprime" status.
"It's diabolical," said Travis Plunkett, legislative director of the Consumer Federation of America, a nonprofit watchdog group in Washington. "They'll hit them with terms that will give the word 'onerous' a new meaning."
A final reason the credit-card companies will welcome back the recently bankrupt with open arms? The companies really miss them. Their bankruptcies aside, these customers were pretty profitable, said Ed Groshans, a specialty finance analyst at Fox-Pitt, Kelton in New York.
"Those were the ones who were getting late fees, over-limit fees, and probably bounced a check every once in awhile," allowing the card issuers to hit them with one lucrative charge after another, Groshans said. "Those were like nuggets of gold on a company's top line."
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something is ethically wrong about the comments and it is just as i always thought. the poor are destined to be poor and are treated worse then the rich. be warned and change your ways nows that you know they live off of you.
goldent nuggest? lol. i hate to tell them but who filed bk on whom and who doesnt have to to pay whom?
i WIN both times now. my new motto: no payeeee because of BKieeee!
and now they want to give me credit cards to help build my credit cuz they think im goona rack up the late fees. little do they know i never paid a single late fee in my life. they are all getting discharged.
well anyways, this all shows us that they prey on us and will continue to do so. think ahead and use them instead now that they are coming a crawlin back
!!
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