Credit card companies target people fresh out of bankruptcy with credit offers, a finding that raises questions about the industry's efforts to paint bankruptcy filers as "untrustworthy deadbeats," according to a recent study.
The study by Katherine Porter, an associate professor of law at the University of Iowa, found that nearly 100 percent of more than 300 families surveyed had been offered new credit cards within a year after completing Chapter 7 bankruptcy proceedings.
Of 341 families who were solicited, 87.7 percent received credit card offers that mentioned their recent bankruptcy filings. More than 20 percent were solicited by creditors whose debt had been discharged through the bankruptcy.
"Debtors report being overwhelmed after bankruptcy with a variety of credit solicitations from many sources," the study says.
The findings of the study show "how the credit industry seeks to profit from financial distress," Porter wrote.
Porter said the findings in her study, "Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending," cast doubt on the industry's own arguments to justify sweeping changes to the Bankruptcy Code that have made it more difficult for individuals to wipe out their debt. The industry lobbied for the 2005 legislation - saying lenders were losing money as bankruptcies skyrocketed and debtors abused the system.
"The strong overall pattern of credit offers to bankruptcy debtors suggests that creditors themselves reject a view of bankruptcy filers as either immoral individuals who chronically fail to honor their obligations or as strategic actors who are apt to abuse legal protection to avoid debts," the study says.
Porter said she hopes her study can help reshape the debate over financial responsibility, bankruptcy reform and the duty lenders have to make sure Americans aren't taking on too much debt.
Porter said most of the individuals interviewed for the study didn't accept the offers. Many, she said, expressed shock and frustration over the number of solicitations they received - an average of more than 14 per month, compared with the six offers industry researchers say the average American gets.
Advocates for the consumer credit industry say people just out of bankruptcy need new opportunities to obtain credit so they can rent cars, reserve hotels rooms and begin the process of rebuilding damaged credit.
"There's nothing necessarily wrong with making credit available to people who've just gotten out of bankruptcy," said Philip Corwin, a lawyer at Butera & Andrews in Washington and a consultant for the American Bankers Association, which lobbied for the 2005 bankruptcy-law changes.
Porter argues that the credit card industry actually profits from financially distressed customers.
"There's no doubt that the way the industry profits in the consumer market is changing and has changed," she said. "Profitability doesn't necessarily require full repayment."