Increased Debt Collection Efforts and Bankruptcy
I wrote a brief post a couple weeks back about how banks and credit card companies might begin declaring and exercising a right of offset, particularly on its business customers. If you don’t remember the post, it discusses how banks are increasingly seizing funds in the bank account of debtors who have business credit cards. I also wondered whether banks would begin making the required disclosures to create a right of offset against individual, non-business, credit card holders.
Well, it turns out that increasing their use of the right of offset isn’t the only way that banks are stepping up their efforts to collect from those in credit card debt during this time of increasing debt and past due accounts. Wells Fargo has taken a different tactic - it is sending letters to customers it believes are at risk of defaulting on their debt with offers of repayment plans and consumer credit counseling. The San Francisco Business Times reported that the letter says, in part, “Wells Fargo strives to meet the financial needs of our customers, and intends to work with customers through both prosperous and challenging times.”
The effectiveness of the tactic is in doubt in my mind. First, I expect that many individuals will throw the letter away thinking that it is junk mail. Second, credit card debt in America is a taboo subject. Even if the debtor realizes that they are in trouble financially, I expect that the culture of silence surrounding debt will prevail over the offer to talk through the recipient’s credit problems with their debt holder. The evidence in support of this point can be found in the housing market - there have been multiple offers by government and mortgage companies to assist subprime mortgage holders before they lose their home to foreclosure and yet foreclosures are increasing in the United States. Moreover, I don’t think that Americans trust credit card companies, and by extension the bank holding their debt, enough to believe that their offer is genuine. A recent article by the Associated Press cited a survey which found that 58% of Americans don’t trust credit card companies. And debt collectors certainly haven’t done creditors any favors with their debt collection tactics.
I wonder just how far Wells Fargo is willing to go to help its customers. Offers of credit counseling and payment plans seem like a relatively insignificant gesture. Will Wells Fargo go so far as to negotiate the amount of debt and interest rate down in order to make payments easier if its debtors are in trouble? Banks and mortgage companies have said that they are willing to help those having difficulty making their house payments, but the bureaucracy behind securing approval for a short sale that I have heard about anecdotally would suggest that the truth in practice is quite different. If Wells Fargo were truly concerned about the financial health of its banking customers, I expect that it would have suggested more drastic measures that would both benefit consumers and increase the likelihood of debt repayment.
The San Francisco Business Times speculated that Wells Fargo might be using card balances, credit limits, and credit scores to determine which accounts to send the letter to. Just two paragraphs later, the article talks about a prior statement that Wells Fargo knows the income of its card holders flowing through their checking accounts. It turns out that many holders of Wells Fargo credit cards also have bank accounts with Wells Fargo. I wonder why the San Francisco Business Times did not suggest that Wells Fargo might be looking at the checking account balances and income of its customers in order to determine who is at risk of default? My mind is running rampant with privacy concerns about this potential practice.
Wells Fargo isn’t the only bank that’s trying to collect on its problematic accounts. The Houston Chronicle, in an article that has since disappeared into the depths of the internet, took note of a more traditional method for debt holders to collect debt owed to them that is increasing - lawsuits. One lawyer representing consumers said that there were 10 times more lawsuits filed in Dallas, Texas, over consumer credit card debt than three years ago. As courts find ways to streamline the legal process for smaller consumer debts and debtors don’t find the same protection in the bankruptcy laws that they once did, debt holders are finding that the potential financial reward from a judgment compared to the costs of bringing a lawsuit weighs in favor of litigation.
One factor that may be driving the increased litigation is the likelihood that the debtor will not retain an attorney to protect their interests. A recent Wall Street Journal article noted that the cost of hiring an attorney for a Chapter 7 bankruptcy filing averages about $1,000 - a pretty large chunk of change for those without sufficient money to pay their creditors. Representation by a lawyer for a Chapter 13 bankruptcy averages about $3,000.
Despite the potentially high cost, a brief look around the country indicates that bankruptcies are up a substantial amount. Bankruptcy filings are up 31% in New York in the first seven months of 2008, according to the NY Daily News. San Jose, California, has seen a 70% increase in the number of bankruptcy filings over the past year, according to the San Jose Mercury News. While some might blame the increase in filings on the irrational exuberance of the nation’s youth taking on credit card debt, it’s seniors who have been hit particularly hard in current times, composing approximately 22 percent of bankruptcy filings, according to the Corporate Dispatch.
How are corporations faring in these economic times? It’s a safe assumption that corporate bankruptcies haven’t increased at quite the pace that law firms would have expected - as the Wall Street Journal recently profiled them as waiting for work - though there have been some high profile bankruptcies recently - Steve & Barry’s, Bennigan’s, and Mervyn’s to name a few.
