Credit card bankruptcy
Addiction to credit cards resulting in bankruptcy behaviour in America Executive Summary: This article explains the meaning and types of bankruptcy, its impact on individual, and the growing concern in America resulting from increasing level of bankruptcy cases every year. Bankruptcy is caused and affected by various factors. This article highlights bankruptcy related to credit cards.
Bankruptcy is a legal proceeding in a bankruptcy or federal court in which a person or a company, who is unable to pay back his/her loans and debts, is left with no other option but to make a fresh start. Bankruptcy filing safeguards an individual or a business against creditors. There are different types of credit card bankruptcy classified under different chapters and every chapter follows same basic process. In every bankruptcy filing, there are two types of parties involved: Debtors and creditors. Debtor is a party who is in debt and owes money to the creditor whereas creditor is an organization or a person to whom money is owed. There are two types of debt: secured debt and unsecured debt.
In secured debts, a debtor gives guarantee for repayment of a loan
In unsecured debts, creditors have no legal right to collect those debts.
Types of Bankruptcy
There are four types of bankruptcy. Whether you are an individual or a part of a corporation, there are numerous factors that need to be considered before filing a type of bankruptcy. In both personal and business situations, bankruptcy can helps the individual to restore their financial position.
Chapter 7: Both individuals as well as businesses use this type of bankruptcy. It is also known as liquidation bankruptcy because it involves liquidation of all assets except those that are exempted in the state. Exemptions allow the debtors to keep certain assets with themselves although these exemptions vary from one state to another. In Chapter 7,most of the persons unsecured debts are eliminated and all the non-exempt assets held by the debtors, are sold off by the trustee so that debts can be paid off to the creditors to the fullest possible extent. After paying off some of the debts from the liquidation assets, the rest of the remaining debts that cannot be paid off through liquidation, are discharged.
Chapter 11: This credit card bankruptcy involves complexity and is available to both individuals and businesses who wish to reorganize their plans to pay off their debts while still continuing their business operations. Debtors are required to submit their plan in the court within a a period of 120 days under Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Chapter 12: This type of credit card bankruptcy is especially for family farmers or farm owners allowing them to pay off their debts over time.
Chapter 13: This type of bankruptcy is very expensive and requires the assistance of attorney. Like Chapter 12, It also requires debtors to submit their repayment plan to the court within a time limit and once it is approved, debtors have to make their payments according to the plan. Incase they fail to do so, then bankruptcy can be converted into Chapter 7.
Impact of Bankruptcy on individual
The adverse effect of bankruptcy is that it spoils the credit history of an individual for up to ten years and in this duration; individual declared bankrupt will not be provided any credit by credit grantor. Although there are provision and plans under which an individual or a business declared bankrupt can pay off some of their debts. After bankruptcy has been filed, a person can rebuild his/her credit report over a period of time through hard work and improving his financial condition although it will not be that easy. The dependency on credit card is increasing at a high rate. People do not have to wait for their wages/ income for their necessary shopping. They can easily do their purchases through credit cards and repay back afterwards.
In a situation, where a person is in bankruptcy, it becomes very difficult for him/her to build his credit rating because most of the banks or big companies do not offer him/her a credit card or issue loan due to his bad debts. Even if they urgently require money for some reason, they feel helpless.
In such situation, they are issued a credit card bankruptcy, which is basically issued to give some credit to bankrupt people despite their bad credit.
Bankruptcy credit card gives people an opportunity to build and improve their credit scores by paying off their debts on this card on time. By doing this, they will also be able to get other credit cards and loans in future. But the main drawback of this card is that its interest rate and annual fees is very high.
Bankruptcy and Credit card
There are various factors that contribute to the increasing rate of bankruptcy. For example loss of job, bad personal habits such as smoking, drinking alcohol, drugs, gambling leading to misuse of money, divorce, rising prices, high medical bills, social and family issues-divorce, financial dependency of other family members etc. Creditors definitely have the major contribution in increasing bankruptcy. All these problems led to the increasing use of credit cards resulting in increasing debts and high interest rate on borrowings. The credit card issuers does not only provide them the facility to use the card directly but it also allows them to withdraw cash from cash machines using their credit card while charging extra for the service. Cash withdrawal machines are also installed within the gambling casinos.
According to the Federal Reserve, in the last 5-year, profits on banks cards reached 2nd highest position in 2001 with the increase of more than 50 % as compared to 1997.This is due to the increasing interest rate gap between the standard set by the Federal Reserve and the rate charged by the credit card issuers to the customers. In 2001, Federal Reserves reduced the interest rate by 4.75% where as on an average credit card issuers reduced the rate by 1.35 points only.
Table 1: Net Before-Tax Earnings as Percentage of Outstanding Balances for Large Credit Card Banks, 1997-2001
Year Earnings
2001 3.24%
2000 3.14
1999 3.34
1998 2.87
1997 2.13
Source: Federal Reserve Board, The Profitability of Credit Card Operations of Depository Institutions, June 2002.
Laws to Prevent Credit Card Bankruptcy
More than a million Americans were declared bankrupt last year and due to the increasing number of bankruptcy cases in America every year, US has made it more difficult for individuals to file it by strictly regulating bankruptcy law. Due to the increasing levels of credit card default and bankruptcy, a proposal was made by credit card companies to amend the bankruptcy code in order to limit the dischargeability of credit card debt in bankruptcy. This way debts incurred with no intention to repay will be considered non dischargeable. US legislation is still working on the final bankruptcy bill but it would surely affect low and middle income people as it would limit the dischargability of secured and unsecured debt while giving creditors more rights to challenge the liquidation of some debts. Those debtors who do not meet the criteria of chapter 7 would be shifted to chapter 13 bankruptcy so that most of the debts can be restructured and repaid over the period of time.
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