The flip side of the new Bankruptcy Act
Congress passed and the president signed legislation earlier this year that made filing for personal bankruptcy a much more difficult proposition. At the urging of the financial industry – especially credit card providers and banks – new legislation was drafted and approved, ushering in stricter requirements governing personal bankruptcy. There is a flip side to the new law that actually hurts lenders more than they expected; please laugh with me as you learn exactly what this other side is like.
When President Bush signed legislation making personal bankruptcy a more difficult proposition, credit card providers and banks hailed it as a significant step toward reducing the number of dead people who skirt their financial obligations by filing for personal bankruptcy. Creditor sentiment quickly changed, however, as the ugly downside of the new bankruptcy law reared its head: people were paying off their debts faster than ever before! Realizing that there is no second chance with the new law, consumers react with fear and pay off their debts. So why is this ugly for lenders? For two reasons:
1. Consumers aren’t using their credit cards as much, so their debt levels are already lower.
2. Consumers are paying down existing debt at a faster rate than ever before.
The result? Less revenue for lenders as consumers wise up. MBNA and Capital One, two huge credit card providers, are seeing their profits sink. Other credit card providers report similar results. Heavily dependent on your willingness to rack up debt, these companies are now seeing their profit margins plummet. In short: big consumer debt equals big profits; low levels of consumer debt equal low profits.
I’m sure you’re already having the same laugh as me. Keep smiling by paying off your debt and buying what you want with cash. Oh, by the way, ignore the increased flood of credit card applications in your inbox: you don’t want to change the mood of the financial community, do you?
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