Protecting credit card issuers from deadbeat debtors...

The words were surprisingly clear. As the ink was drying, the proclamation was made: "The act of Congress I sign today will protect those who legitimately need help, stop those who try to commit fraud, and bring greater stability and fairness to our financial system." The speaker is well known.

The effects of his pushing for and signing into law the new Bankruptcy "reforms" will soon be even better known. Harvard University completed a study finding that more than 95 percent of the personal bankruptcies in the United States arise from one of three causes: overwhelming medical bills, family breakup, and the loss of a job. One has to suppose that people falling into these categories are what is meant by those that are trying to "commit fraud" since they're the ones targeted by the changes in the law.

The federal law now also extends-countrywide- the protections offered by a number of states to those who "legitimatly need help". The states which have recognized this group of individuals have permitted the use of Asset Protection Trusts. These protect any assets placed into them from seizure by creditors. Stocks and bonds, second and third homes, and jewlry are but a few examples of the "necessities" that can be protected. Naturally, these trusts aren't for everyone. They are expensive to set up. It's unlikely that any of the people mentioned above (who fall in the "commit fraud" category) would have sufficient funds available to hire an attorney, financial planner, and an accountant for assistance in obtaining one. That's why it's a protection extended to only those who "legitimately need help". It's intended to allow the "legitimately needy" to live in any state they wish to.

The third goal of the Administration and this Congress was to "bring stability and fairness to our financial system". The class, or groups, protected under the new law under this section is the banking and credit card industries (auto financiers deserve a special mention as well).

These entities, they claim, have long been victimized by the terminally ill, family breakups, and the unemployed. A quick peek at their earnings reports (prior to the "reform") shows that there is some merit to their argument. They could have made a lot more money than they did were the "reforms" already in place.

JP Morgan Chase reported a 2005 first quarter profit climb of 17 percent which was highlighted by its profit growth in the credit card business. Chase reported earning of $2.26 billion compared to $1.93 billion in the first quarter of 2004.

Bank of America reported profits of $4.7 billion which is an increase over $2.7 billion a year ago.

Smaller banks (lenders) also could have done better had the "reform" been in place earlier. As it is, they were only able to show the following: Sun Trust Banks Inc. of Atlanta reported 2005 first quarter earnings rising 36 percent while First Charter had an increased fee revenue and fewer loan problem loans showing a $10.3 million profit or 11.6 percent increase over 2004. Finally, First Trust Bank showed profits increasing 31 percent.

It's worth repeating. These numbers are pre-"reform". They seem to indicate that contrary to popular belief, Americans, absent devastating circumstances, tend to pay back their loans despite being subject to economic ill-winds with hardly any safety net beneath them. But then there is the "stability argument". Perhaps the lenders want a nice, stable return defined within the parameters of "no ceiling for profits, protection if profits aren't high enough". That's quite a business plan, not to mention a unique economic model.

Anybody who thinks that none of this affects them negatively must live in one of the two protected worlds described above. The rest are more likely than not to fall into the vulnerability of the first group (vulnerable) described above. To prove that point consider: There are 657 million bank credit card holders, 228 million debit card holders, and 550 million store credit card holders who, combined contributed $14.8 billion in PENALTY fees in 2004. With that much at stake (financially) in collecting penalties, it would be foolish for issuers of the cards not to come up with new and inventive ways to push a debtor into a default (late, etc) mode.

The next post contains some of the identified these methods. They add a new twist to the question, "What's in your wallet?"

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