America’s middle class is addicted to a new kind of credit
The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse.
Yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit.
It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.
In just five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Subprime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion. In the process, they’re helping transform the way that a large swathe of the country accesses debt. And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.
*Source: MSN Money, Tuesday October 29, 2019: Christopher Maloney and Adam Tempkin
“Can You Afford To Go Bankrupt?”
Onerous living expenses, a fiercely competitive business world, the devastating recession, and reliance on credit are all contributing factors to the rapid rise in the number of people who see bankruptcy as their best — or only — option.
In 1960, about 110,000 Americans filed for bankruptcy. That number swelled to nearly 1.8 million by 2005.
Bankruptcy laws were designed to facilitate a “fresh start” by absolving or significantly reducing an insurmountable debt, enabling a person to regain their financial footing.
The promise of a fresh start certainly appeals to those who see no light at the end of their financial tunnel, but the rapid rise in filings also led to a series of reforms that have rendered bankruptcy a more complex process.
Congress passed the Bankruptcy Reform Act of 2005 at the behest of credit card companies and other creditors who felt abused by the system. The act tightened many of the qualifying criteria for bankruptcy protection.
“In the 1990s, I dealt with a couple who earned about $1 million a year facing a $10 million lawsuit,” says Tuvia (Ted) Mozes, Esq., a Spring Valley,New York, attorney who has dealt with bankruptcy law for over two decades. “They successfully declared bankruptcy and were fully relieved of liability despite the millions that they were going to earn in subsequent years. Today, they would never get away with that.”
The tougher criteria have increased the onus on bankruptcy filers to prove that their accumulated debt and claims of inability to pay are not abusive. In addition to filing additional documentation and paperwork, the law also requires filers to attend a debt counseling session before pursuing bankruptcy. Attorneys have typically upped their fees due to the more demanding requirements. The total cost of a personal bankruptcy filing, including court filing and attorney fees, is in the $2,000 to $3,000 range (when there are no complications).
Consumer advocates opposed the 2005 law from the outset, claiming that it unfairly shut legitimate filers out of the process. A recent study submitted to the National Bureau of Economic Research (NBER) claims that each year, between 200,000 and 1 million Americans do not file for bankruptcy because they cannot afford the costs. The study also noted two ironies: a spike in filings after taxpayers receive some extra cash from their tax refunds, as well as the fact that today’s bankruptcy filers typically have the means to do so. “It ends up being the relatively better off, or middle class consumers, who can actually afford to file and the people with lower incomes can’t afford to file,” says study coauthor Jialan Wang.
The reform act accomplished its goal, at least initially. In 2006, bankruptcy filings dropped by over 60 percent from the previous year, to under 700,000. However, the numbers quickly rose to the 1.4 to 1.6 million a year range in recent years, just a notch lower than during the pre-reform era.
Did the reform act root out only the bad apples?
For the most part, consumers with legitimately insurmountable debt are able to satisfactorily complete the process even today. Mr. Mozes attributes some of the drop-off in bankruptcy filings to the greater availability of other options for debt relief, such as credit card settlements, loan modifications, and short sales for people with homes that are underwater. Manhattan bankruptcy attorney Robert M. Fox, Esq., says that he has indeed noticed that recent filers tend to be more professional and “white collar” than in previous years, but he attributes that to the fact that these people may have staved off bankruptcy for several years by using their savings and other assets, which have by now been depleted. “As a rule of thumb,” says Mr. Fox, “you generally don’t consider bankruptcy unless you have over $10,000 in unsecured dischargeable debt, and the fees will usually total less than if you try settling that debt any other way.”
*Source: Mishpacha, Can You Afford To Go Bankrupt?, Tuesday June 12, 2012