Bankruptcy Rates: A Response to Todd Zywicki

Todd Zywicki (TZ), the long-time cheerleader for the credit industry on the bankruptcy bill, says on Volokh Conspiracy that bankruptcy rates have gone up in anticipation of the bankruptcy bill’s becoming law on October 17. (He says filings in April increased by 70% from January, but the same data source shows that filings were only up 16% from April ‘04.) This increase, he claims, just proves what he said all along — that the debtors could pay, but they are strategic and take advantage of those poor credit card companies.

TZ must believe that it is irrelevant that, starting in March, there have been literally thousands of news stories warning consumers that, if they’re in trouble, this may be their last chance to file for bankruptcy. This coverage reached all the way to local papers like the Des Moines Register, the Wichita Eagle and the Iowa City Press-Citizen. Bankruptcy has never before seen the kind of advertising blitzkrieg as it has had since the debates heated up in Washington. Maybe some people in trouble said to themselves, “No more putting it off — if I need help I’d better get it now.” But that’s a long distance from TZ’s vision of hordes of Americans whipping out their credit cards in a wild frenzy, buying what they don’t need in the gleeful knowledge that they can escape their debts with a quick trip to the bankruptcy court.

TZ also cites the rising credit card rates as proof positive of bankruptcy abuse. Why else would rates be rising? Perhaps the latest change in OCC policy has something to do with it: increasing the minimum payments from 1-2% of principal to 6%. In the near term, the higher payments required by the OCC are likely to cause an immediate increases in credit card defaults as over-burdened consumers come up short. Over the long run it may be a good financial move to shorten the payoff time for credit cards, but the immediate effects concern lots of industry watchers. Would it be surprising that credit card interest rates would rise on the news of coming defaults? Similarly, talk of a housing bubble worries credit card companies as well, as borrowers’ net worth may fall and their creditworthiness along with it.

But the significant change in OCC policy or other economic changes that might affect interest rates don’t matter to TZ. When he has a chance to criticize families that seek help through bankruptcy, he doesn’t pass it up.

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