cross-posted at Dailykos.com
On August 20, I posted a diary titled Your Credit’s the October Surprise 2005.
It’s now October. In less than ten days, all minimum payments for credit cards must be quoted for a 10-year paydown. That’s roughly 4% of your outstanding balance, if the guidelines are adhered to.
To clarify — the minimum payment guidelines comes to you compliments of the Bush administration, not Congress. It’s a directive from the Office of the Comptroller of the Currency (Dept. of Treasury). In other words, an executive decree that just happens to coincide with the activation of the new bankruptcy.
I have spread the word on line and on foot. Let’s see what’s been afoot in the world of consumer credit card debt since we last spoke.
The October Surprised: Real People With Real Concerns
In August, we mentioned that it won’t be just college kids and retirees on fixed incomes who are sandbagged by the new regs, that in fact the list of concerned citizens would include
- small business owners use personal credit cards as cash flow management tools;
- persons who work for commission; or
- workers with seasonal cash streams (skilled and unskilled laborers, for example).
Several Kossacks weighed in with personal, even heartbreaking anecdotes of their situations; I invite you to peruse the earlier diary for their comments.
However, I can speak to the stories I’ve heard in the real universe here. We’ll use Men in Black style monikers to guard their privacy:
K, The young entrepreneur
“K” owns a landscaping business and has significant credit card debt; he is a savvy young businessman with a good business model and excellent prospects for growth. He knows about business lines of credit but uses his personal cards because in his experience banks issue rates that are worse than credit cards, or want securitization. “If I had that kind of cash on hand, I wouldn’t need credit!” he laments. Realistically, LOC’s are for established businesses with lots of equity on hand and looking to expand. “K” is in a start-up mode, and like lots of starters, it’s a not-quite-but-might-as-well-be shoestring operation at the moment. So he uses credit cards.
And that’s not about to change; he will suck it up and pay more if he must, and play it out as long as he can.
Coupled with rising gasoline prices, which are the worst here in the Carolinas thanks (officially) to the hurricanes (we get 90% of our gas from the Gulf, something that we’ve learned the hard way), he’s concerned about a squeeze.
S, the construction magnate
S is a surprisingly young and unprepossessing millionaire who, along with two other partners, owns a company that has thirty trucks and pieces of large equipment, with half a dozen construction workers apiece that stay busy all the time. Much of what he does is on a cash basis, except for one thing: gas cards. He paid $130,000 in gasoline invoices last year, and you can imagine what he thinks of rising energy prices, and what it means for him. Will it put him out of business? Not singlehandedly. But he has customers who pay big bills, too, and that might mean the work will dry up. And that could put him out of business.
J, the state employee turned business owner
“J” lives off a pension and a dream — to run his own accounting firm. He’s not a CPA, but he’s got decades of tax experience and a growing, modest portfolio of individual and small business clients and is someone I’d trust with my money — so I do.
His project is relatively new, less than a year old, and it’s not in the black just yet, so it’s eating into his savings, already depleted by obtaining office space and keeping the lights on.
Does he use credit cards? Not so much, I think, but he’s also the guy who first told me that the new regulation is going to hit small businesses hard. In his words: “This is information that I need to know so that I can tell my clients!”
D, the bankruptcy attorney
Is licking her chops. After October 17, when all cases go to Chapter 11 and Chapter 7 becomes much more unobtainable, the due diligence required by law from attorneys will quadruple — and so will the billable hours per case. She giggles as she says this. In other words, it will not only become more difficult to get out of hock, it will cost you more to do so.
She expects her firm will do very well, indeed. It’s doing great now with the jump in filings. It will do even better, with the bump in fees after the new rules come into effect.
I ask her if she’s worried about defaults spiking. Her response: no. People with something to lose by running will file. People with nothing are the ones who just run.
Z, the banker
Is nonplussed, and figures that people will soon enough start using their cards where they once used cash, and just grow comfortable paying a higher amount per month on the card than on bills they used to pay elsewhere. This will result in a consolidation of credit; where you once owed twelve people money, now you’ll owe just two — or one.
I told him that a lot of debt isn’t transferrable, for example mortgages and car loans. He contradicted me that it is indeed possible to pay out car loans on an unsecured credit card. It’s a question of what the rate is, and for some people that can be competitive with traditional auto loans, secured by the value of the car itself.
I said, yeah. Some people. Others are going to look at the difference between paying 6% and 16%, and for choices like that, everybody in the room is a financial genius.
He smiled, and drowned a chuckle in his beer.
He resurfaces, and says that is indeed so: On paper, the goverment is doing people a favor, so long as they have the cash flow to pay off their debts faster.
So long as they have the cash, I add.
Hmm-hmm, he answers out of his beer glass.
P, also a banker
And for some reason, beer, too, is involved. 🙂
The conversation turns to my October Surprise project. P works for a bank that is eyeing its credit risk exposure carefully, same as the others, and wondering what moves to make in preparing for the expected surge in defaults (discussed in the prior edition) post-October 17.
I remark to him that I imagine his bank is going to push home equity lines, to migrate unsecured debt to secured debt. (We discussed this, O Kossacks we, last time around.)
His answer: You mind if we run with that idea?
You’re kidding, right?
P’s answer: If that’s in the cards, no one’s bothered to tell me, but I don’t work with cards or home equity lines. But I think it’s a sound concept, and I’d be happy to take credit for it!
Sure, fine, I answer from the bottom of my suddenly-upturned beer glass. Gulp gulp you’ve got to be kidding me
Something you might have noticed
Excepting myself (heh heh) — We’re not talking hobos and hillbillies, here, and all of them are concerned — though to different degrees, and about the fate of millions of at-risk American cardholders to different degrees. These are people with strong business minds and even Miss D when she gets to thinking about it have their fortunes threatened by the change in regulations.
Now, imagine how the double-whammy of doubled credit card payments and no recourse would affect someone of more modest means, and more extensive obligations.
I read quite a few tear-jerker cases back in August. Here is the one I know in real life:
T, from marketing
T is an industry leader in moving manufactured products in stores. His knack is drawing buyer interest to his company’s goods and keeping sales high. It’s an exotic, experiential skill, the sort of thing that cannot be outsourced or automated or done without.
Well, that was three days ago. Two days ago, his position was eliminated. Oh, he was given a nice fat severance — three months paid vacation! he declares proudly that day, and bitterly the day afterward. Three months paid vacation! Oh, I’ve got prospects! Two days ago. Oh, what am I going to do? Yesterday.
He knows about my October Surprise project, but not the details. He inquires. That was two days ago.
It’s no accident he’s not in quite the same upbeat mood.
As I told you guys in the prior edition, the worst hit folks will be people with great credit, large debts, and tight cash.
T is exemplary in this regard, and for reasons that some of you mentioned in your own comments.
For you see, T is a widower. He loves his wife dearly even still, misses her like a recently-amputated arm. He carries a wav file on his cell phone, that he stumbled across a few months back when, while putting away some of her old personal belongings, accidentally activated her cell phone.
He played it for me; it’s the sound of a woman in love, leaving a message for her husband to find, thanking him for being her husband and her lover and her best friend.
And now she’s gone, taken by cancer, with nothing but approximately $1.5 million in medical bills filling the void where her life once was — and those bills insist on being paid.
Until this week, T was making six figures. He’ll make six figure-rate pay for another three months.
Then he’ll have to contemplate what to do about his house, his new BMW (nearly if not over six figures), and all those medical bills — the chief reason that people with formerly sufficient means and good credit cease and desist having both.
He asked me if he should consider filing for bankruptcy, given the change in laws. I said consider it? Yes. It might be best to negotiate for more reasonable expectations from the medical creditors, though, since he had the option for a few more days to leave them in the cold if they don’t…but wait until they came back before doing anything. If he filed ahead they’d have no reason to play ball. He doesn’t want to file for bankruptcy, but as we’ve mentioned here in the past — don’t die of shame.
I didn’t say this, but I’ve said it here and it bears repeating: Don’t die fearing to do what it takes to save you and your family, because of what the neighbors might thing, because you first responsibility is to the preservation of yourself and your household. And besides — perhaps the neighnbors filed last week, and were afraid to mention it to you, worried about your opinion. And wouldn’t that be just plain pitiful?
Spreading the word online
Lots of Kossack interest, with diaries by:
the honorable Congressman John Conyers
the most excellent bonddad, and another dose of bonddad, here
And no bibliography of economics issues is complete without the incomparable Stirling Newberry.
Awareness of the October Surprise Farther Afield
Dave Saxton at MacRaven
Dave Haxton over at MacRaven ran with this topic for quite a few days on his blog; I had a few exchanges with him. He did exactly what I wanted — he found out what this means for himself and encouraged others to do likewise.
The evolution of his four blog on the topic say it all:
Wow!
Wow! Part Two
More Wow!
Not Quite Totally Wow.
What Dave found that contributes is that the banks aren’t quite going along with the rules, and that this offers some daylight…
I finally managed to get a hold of some upper level people at the card companies with which I have business dealings, and have discovered that they’re all planning to implement these regulations in a rather creative way. Rather than going to the exact limit – from 2% of the outstanding balance to 4% – they’re going to “interest and fees plus 1% of the outstanding balance, or 2% of the outstanding balance, whichever is greater.”
This is good for me, personally, as it means my minimums will not be rising by much, if at all, due to my excellent credit rating and history, and hence my relatively low interest rates on these loans. But …
This formula is utterly dependent on interest rates: get a higher rate on a given card and you’re screwed. And getting higher rates on your existing loans isn’t tough: just be a day late on a single payment!
Given that many credit card companies have recently raised fees and rates, and that the Fed shows no interest (pun intended) in lowering rates out of a (misguided, I believe) fear of inflation, the impact on the economy still promises to be something rather severe. Probably not a repeat of the Great Depression (which it could’ve been if the companies had stuck exactly to the intended meaning of the regulation, rather than to the letter) but certainly a recession, and possibly a rather deep one.
That is — it offers daylight if you have great credit and get super rates. If you’re like many non-Daves and non-cskendricks, you’re not in a happy place…and only a few paychecks separates me from that non-happy place, too, so I’m not comfy, either.
Dana Blankenhorn at Corante
Wow. I wish I’d seen this write-up sooner than, well, just a few minutes ago.
The opening line says it all:
The next U.S. recession will start in earnest on October 17. (If it hasn’t already.)
What Mr. Blankenhorn does beyond my paltry means is explain that creditors are getting slammed by this, same as debtors:
Start by understanding that, to a credit card bank, the balance carried on a borrower’s line is an asset. (The animated gif is from Foreclosure-loan.com.)
Faster write-downs of credits by borrowers means fewer assets for credit card banks. Forcing borrowers to pay back their loans, even after bankruptcy, means those assets can’t be written-off, and those bankrupt borrowers can’t be extended new credit. It’s a squeeze on bank assets, from both sides of the ledger.
So two things happen, even in the best of all possible worlds. Assets decline, while new assets become harder to generate.
Could this have been prevented? Yes. A slow phase-in of the new rules, and a major publicity campaign about them starting, say, last January, could have given us a “soft landing.” But it’s really too late for that now.
For the rest, and it’s some seriously good stuff, check out the original. I’m honored to have sparked some serious commentary. 🙂
Our Friends at Redstate
I cross-posted a duplicate diary here, where much to my surprise, it remained on their recommended list for the better part of a week!
The Pubs were skeptical as all get-out about my argument, but they were thoughtful, polite and presented their points in good faith. It was easily the most challenging room I faced.
One economist tried the “it’s financially neutral” gambit with me. I walked through a macro and a micro rebuttal of his refutation. That was probably as tough as it got. Judge for yourself who won the round.
The Most Excellent Boo-People at Booman Tribune
This diary contained one of the more touching personal accounts activated by my original October Surprise posting. I think B’s account got to me because it was the first time that i realized I had written something that had a power to cause change in people’s lives and I held a responsibility for that change and that I’d damn well better be certain it was change for the better.
Let’s give our next anecdote a shout and a prayer and all the love you can send her way.
I’m duplicating this post in full.
B, finishing her dissertation and raising a family, too
The spouse and I have been considering bankruptcy for quite some time. We don’t own a house, our cars are used and paid off long ago and we don’t own anything large of value except our computers….
We have HUGE amounts of credit card debt (approx $45,000). I really liked this diary and read all of the linked to articles. The thing that pisses me off in all of them is that they’re talking about $18,000 Hawiian vacations, and $1,000 sofas and whatnot — I assure you that NONE of these things were purchased with our credit cards.
About 1/2 of the debt was incurred by me when I was a single mom, after I had run through all of my retirement and other savings (while working two-three jobs for 2 1/2 years). The cost of daycare, healthcare and rent/utlities/food for the two of us was NOT covered by my income. Fast forward 4 years….
I am now married, have a second son, my husband works his butt off and brings in a take home of about $1800 (after taxes, insurance premiums, etc.) are taken out. I have been out of work for over 10 months….I am trying to finish a dissertation, I am trying to find work as well. Our rent is $1225/month, we can’t afford to move…anyway, on and on, you can see how we may have accumulated a few debts along the way trying to make ends meet. We have good credit and so do not pay anything above 10% in interest and on some cards as low as 2%. A couple of the minimum payments went up over the summer, but not all of them. We are struggling as it is and I was hoping to have a job by now.
In some ways, i feel guilty filing for bankruptcy, on the other hand, our largest chunks of debt are our school loans (currently about $90,000) so we would have to pay those off in any case….right now, mine are in deferrment because I’m still in school (could this be why I am procrastinating finishing?) but we have been paying on my husbands for the past 4 years (his is the much smaller one)….
We cannot handle any more right now — I would rather destroy our credit on our own terms (bankruptcy) than go through the painful process of 30% interest rates and bill collectors calling at all hours, so I’m thinking now might be the time to do it. Does this suck?
The exchange went on for some time; there were several participants. The heroine would have to be Mnemosyne, who should wisdom and compassion and calm when all three were needed.
Euro-Cred at Eurotrib
third and last of the cross-postings
Not so many comments here, since I posted it very, very early in the European morning, but it’s part of the distribution. 🙂
Other Blogs that I could find
The Media – Yeah, Those Guys
We covered a lot of news articles back in late August. We’d be remiss not to update our clippings, now that the October Surprise is nigh:
A Run on the Bankruptcies
Capitol Hill Blue may not be universally accurate or loved, but they’re not off here when they lift Mary Deibel’s article:
There’s a run on the courthouse with 10,000 Americans a day seeking bankruptcy protection before a tough new bankruptcy code kicks in at 12:01 a.m. Monday, Oct. 17.
Now, what are all these folks running from? The short list:
1. Tighter income limits to file. – You can henceforth be too rich to be bankrupt. But per one expert (see the article), 85% of Americans don’t make the median state income threshold — which is a comment of a different nature altogether.
2. Much tighter requirements for Chapter 7 – If you can pay $100 a month, guess what? You get to repay everything — at default interest rates. And referring to the above: Far more than 15% of the debtors out there can afford $100 a month, on account they are already paying that much in bills to begin with.
3. Katrina – The 165 mph gorilla in the room. I’ve heard that normally there is a spike in bankruptcies several years after a major storm wipes out a local economy; now there’s no time to lose, on account the rules are about to change.
This one’s worth a direct quote:
With many of the 1 million Gulf Coast residents displaced by Katrina and Rita likely to file bankruptcy, and with extensive documentation of income sources required for bankruptcy filing lost or destroyed, congressional Democrats propose relaxing the law for hurricane victims. But Republicans who control Congress won’t reopen it and say bankruptcy courts can consider “special circumstances” such as hurricanes case-by-case.
4. New, expensive counseling requirements – The fee arrangements have not been finalized, though, though Katrina victims will not be required to go through debtor education courses…so long as they do not relocate.
Oh, good news — private firms will provide the counseling. A link is available at the source site.
5. Chapter 7 protections diluted, even if you qualify – Student loans, for example, will have to be repaid. And at default rates.
6. Let the pile-on begin: Chapter 13 harsher, as well – You will have to repay the sticker price of your car, not just the current value. That 10 year-old Escort with the $2,000 blue book value just septupled in value — on somebody else’s balance sheet. Oh — you’ll have to repay at default rates. Let’s not forget that…debtor!
7. Filing fees, legal fees greatly increased –
8. Dollar limit on home protection – Guess what? Only up to $125,000 of your home equity is secure? Got debt? Get a shack, if you want it to be yours.
Oh, good news — there are five states with unlimited provisions that are Constitutionally exempt. If you live there, you’re protected. Texas just happens to be one of the places where you can be a bankrupt millionaire and protect your wealth by sinking it in a really, really big house.
9. More good news for rich deadbeats- Asset-protection trusts are exempt from the law…and they’re perfectly legal in credit card capital, Delaware.
Aren’t the new laws just?
Crickets chirping.
Class? Anyone? Bueller?
10. Up to $1MM of your IRA – But only up to $1MM. The rest can be seized, alas. Don’t be both old and bankrupt, or it’s the street for you.
But 401K’s are fully protected. You work for a corporation, you’re safe. You own your own business, sorry.
I guess that whole pro-entrepreneur, pro-small business thing was just a campaign song, after all.
11. Our favorite: Credit Cards!-
We’ll burn our direct quote quota here:
However, it’s a rules change by the Federal Reserve and other lending regulators that takes effect next January that has credit-card issuers raising their minimum payment. The new rule aims to make consumers lower their card balances by having lenders set minimum payments at levels that cover interest, fees and some outstanding balance.
Some lenders already have already made the change; others will follow, but the prospect of higher minimum credit-card payments is something consumers considering bankruptcy should face now, financial planners advise.
The Cold Equations – Lots of Folks About to Be Out in the Cold
An article from Peoria covers the math, pretty much as we did two months ago, though it does a halfhearted job of debunking one statistic from yet another so-called expert:
A recent survey by the American Bankers Association showed that less than 5 percent of cardholders only pay the minimum payment each month. But Manning and other consumer advocates argue the statistic is misleading because it only counts people who always pay the minimum, excluding those who pay the minimum frequently but not always.
Neither the comptroller’s office nor credit card industry representatives would offer specifics on how much minimum payments will go up, saying they will vary greatly depending on the card company and the customer.
Whereas we remarked, using industry sources, that the figure of minimum or near-minimum payees is likely in excess of 30%.Per Cardweb.com:
A new survey suggests the impact of higher minimum credit card payments may only affect 10% of U.S. cardholders. However, other previous surveys indicate that as many as 39% of Americans may be making minimum payments.
….
One-year ago the “Cambridge Consumer Credit Index” found that 39% of consumers with revolving credit card balances were making minimum payments and that 39% of Americans were paying off their credit card balances in full each month. The research also found that among revolvers, 39% paid less than half the balance owed but more than the minimum, while 19% paid more than half their balances.
5%, indeed.
It’s For Their Own Good — Just Ask Michelle Singletary!
Singletary is of the view that raising minimum payments is doing the consumer cardholder a favor..and in fact that doubling it is far too low for her liking.
To which I say — If it’s such a good idea, how come it’s freaking so many people out when they are finally made aware of what’s about to happen to them? Why isn’t the Administration stepping up and taking credit for its “great idea”, rather than hiding the executive decree behind the introduction of a law passed by Congress?
I’m never impressed with the virtues of slouching and skulking and stealth, when it comes to public policy…but that’s just me. I have some crazy notion that good ideas can and should be shouted from the rooftops, to the applause of the multitude, and that ideas that cannot bear the light of day and the countenance of its presumptive beneficiaries, well…perhaps they’re not such good ideas, after all.
But that’s just me.
As for Singletary. Wow. What a mensch, he snarked, and meant it. 🙂
Forget “Save” — How Can We Afford to Spend?
this dainty from Freemarket News is interesting, as well:
These are the core four paragraphs…don’t deprive yourself of the entirety of Richard Benson’s article:
Worse yet, for consumers making credit card payments, the US Treasury has new regulations that will come as a real shock this fall. The Treasury has the authority to set minimum principal payments on credit cards and is increasing the minimum from 2 to 4 percent per month. For the average American with a $10,000 credit card balance, that increases the minimum monthly payment from $200 to $400. For the big spender with $50,000 in credit card debt, the monthly payments would pop from $1,000 to $2,000! Needless to say, a large number of people are used to paying the minimum every month, and millions of card holders are maxed out on numerous cards and barely meeting monthly payments. So, even if prices weren’t rising, the American debtor will be getting hung out to dry by a noose of credit cards around their neck.
Between rising prices and debt costs, how bad is it really for the average American? Our guess is that most of us will experience an increase in monthly costs of no less than $300, and many will see their monthly costs rise over $700. Also, “The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005” will require debtors to pass a strict Means Test to determine whether they can have their debts liquidated through Chapter 7 or whether they must enter a repayment plan through Chapter 13. This Act goes into effect on October 17 and is designed to make working Americans wage slaves to the bank for life so we’ll not only get squeezed, we’ll get crushed! The Means Test is just plain mean. With this new law, the bank not only comes first but a creditor may get to pay them forever!
Credit card delinquencies, as measured at the end of the second quarter of 2005, have been heading up towards 5 percent. When the minimum payment increases every month along with your heating bills this winter, I am confident consumer loan defaults will keep the bankruptcy courts busy.
Even before this big squeeze of rising costs, most of us couldn’t afford to save. The question now is, “can the consumer afford to spend?” The latest government figures from August show consumption was down by 1 percent, and earnings before inflation were also down. Auto sales figures just released by GM and Ford for September show the sales of Sport Utility Vehicles collapsing by 50 percent.
To comment using approved business language — Eek!!!
But It’s For Your Own Good!
Most of the news articles I googled up, however, are cheering for the minimum payment bump, for a bizarre combination of (a) we’re doing the debtors a favor, here; and (b) they got it coming, and they’ve had it coming for a long time.
Wow. My peeps! They’re looking out for me.
Google “minimum payment” and “credit card” for yourself. You’ll see a lot of duplications.
To Those Who Would Hook The World Up With Less Cash Flow
What. Are. You. Thinking?
Recall my anecdotes, the ones from people I know from the real universe. They make on average, well, a lot more than I do, and I do okay.
All are sharp business professionals, albeit in varying states of obligation to staff, to customers, to family and to the omnipresent creditors, and various positions of vulnerability to the demands of the latter, also.
They are not deadbeats, or spendthrifts, or fools.
All are concerned about the change in the credit card minimums, for the reasons that they offer.
For some reason, enthusiasts of the change only refer to the marginal cardholder, the recovering cardaholic, the shopper with a Rolodex of plastic, the default case waiting to pounce, when addressing whom their policy du jour intends to save.
For some reason, that’s just not the half of it. The change in the rules, tweaked or not, threatens the case I described: persons with good credit and a need for credit due to tight cashflow constraints, which usually corresponds to large debt balances. Consider the cases in summary:
K uses cards because business LOCs require capitalization that he does not have, and if he had it, he wouldn’t need the credit.
J uses cards sparingly, but knows the implications and in fact is the very reason this October Surprise project has their complete and undivided attention as well as many people here in cyberspace. It’s not just a problem for the marginal cases — No one who hears about the doubling-up of payments dismisses it fully; I’ve had people come back to me weeks later and ask me questions about it, if not for themselves, then for an acquaintance…or just because it concerns them on behalf of the country at large.
People are like that, when they are a community. And they are a community when they know you are looking for them, and they feel that impulse to reciprocate. That’s what human beings in amicable association do.
S uses cards as an accounting measure, for the very commodity that is soaring as an expense — gasoline. His concern: This might pinch his clients, and that means it will pinch him, too.
D is loving the extra business, and contemplating the extra paydays after the new laws come into effect, but the high tide will pass, and never return. I think defaults will soar, that there is a real risk of many people doing what one Kossack called “filing Chapter 0”, and this carries real risks for her line of work.
Z has significant debts, the ghosts of careers past. These days, he lives deep within his means, reminisces about the glory days, and concerns himself with keeping safe from the economic vagaries that he once lived for as a trader. He is the one who got this entire line of inquiry started; it took off in directions he never imagined.
P is quite well off, though he is the solitary income-earner for his family and is concerned that the change in laws will in fact hurt the creditors, of which he is one, though encouraging a shift to use of home equity lines will staunch the bleeding once it comes — and the finance sector has been bleeding for quite some time already in anticipation of the new changes.
T is being suddenly and cruelly introduced to the second act of his Life of JOb — bereft of spouse, he is now bereft of income through no fault of his own, and he was living large on both accounts. It will be very difficult for him to scale down a life that he has filled with secular comfort in order to push aside the omnipresent memory of his beloved bride.
Hardly the poor, unwashed masses that the Bush administration regulators and their cheerleaders had in mind.
What one might construe to be a sample of the natural constituency of the GOP is getting harmed by these rules, as well.
So if these folks are getting burned, where does that leave the rest of us?
Where does that leave you, ten days from now?
The clock is ticking. I hope you have been making what preparations you can, and telling others to do likewise.