Bankruptcy Article of the Week
Credit Card Delinquencies the Next Warning Sign?
Mainstream media outlets, including Fortune and CNNMoney.com, have recently questioned whether the $915 billion in outstanding credit card debt in the United States is our next disaster-in-the-making. The $900 billion figure, so close to the total of outstanding subprime mortgage debt reported earlier this year, makes good headlines. But there's more going on here than sensational headlines.
According to the Federal Reserve, consumer credit increased at an annual rate of 5.25 percent during the third quarter of 2007. In terms of raw numbers, that's staggering: in September, outstanding revolving consumer debt increased to $919.4 billion, while total consumer debt swelled to more than $2.48 trillion. That's excluding debt secured by real estate.
And it's not just the amount of outstanding debt that's raising concerns—Citigroup, American Express, Capital One, Bank of America and Washington Mutual have all indicated that they expect higher credit card losses in the near and medium term.
To put that "higher" in perspective, Fortune reported that Citigroup alone was setting aside $2.24 billion in loan-loss reserves. Capital One reported net charge-offs of 3.28 percent in October, up from 2.86 percent during the third quarter. The company also reported 4.87 percent of loans were more than 30 days past due, compared with 3.7 percent a year ago.
And, of course, credit card debt differs from mortgage debt in one very important aspect: it's unsecured. While falling housing values and a buyers' market may have meant significant losses for subprime lenders when borrowers defaulted, there were still the houses. Default on credit card debt doesn't, for the most part, leave assets behind to mitigate the loss.
Since the third quarter of 2005, Debt Service Ratios (DSR)—the ratio of debt payments to disposable personal income—has remained over 14 for the first time in history. During that same period, Financial Obligations Ratios (FOR) exceeded 19 for the first time and has remained at that level since. These figures are especially significant when you consider the historical correlation between DSR and bankruptcy filings.
While there's disagreement about just how serious the growing debt and rising credit card delinquencies will be, it's clear that the credit industry is bracing itself for losses—and that those losses will have a broad impact. If the pattern is true to historical trends, it also means that we can expect a continuing increase in consumer bankruptcy filings as more consumers find their rising DSRs unmanageable.
Maybe it would have been wiser for the credit industry to hold on to some of those hundreds of millions of dollars they spent pushing through a bankruptcy law change that did nothing to enhance consumers' ability to pay.
Did You Know.
that your financial contributions could go a long way toward helping organizations that are responding to the need for pro bono legal services nowadays?
In 2005, in the wake of Hurricane Katrina, Start Fresh Today started what would become a tradition. That year, we organized a bus tour of hurricane-devastated New Orleans and collected $2,800 for the New Orleans Pro Bono Project.
That initial event was inspired by the tragedy that struck New Orleans before our arrival and the increased need for pro bono services among a population in crisis: homes and jobs had been lost, and people had been thrust overnight into troubles they couldn't have imagined only a few days earlier.
In truth, though, people across the country face the same kind of financial distress and legal needs every day. That's why Start Fresh Today has continued to sponsor events to benefit the local pro bono projects at each annual NACBA conference since.
In 2006, we collected $3000 for the Philadelphia County Consumer Bankruptcy Assistance Project, and this year—in cooperation with Total Bankruptcy—we raised $2000 for the Clark County Pro Bono Project. So far, that is; it's not too late to contribute. If you haven't already, please join us in giving something back to the communities that welcome us for NACBA each year. You can contribute to the Clark Country Pro Bono Project at:
Clark County Legal Services
800 South Eighth Street
Las Vegas, Nevada
89101-7051
Thanks again to everyone who attended for your generous support!
Need More Client Inserts?
Request more credit counseling and debtor education inserts for your client intake folders via our new order form, which can also be reached by clicking on the "Order Client Inserts" image in the SFT Newsletter email.
Simply let us know if you are a SFT customer, fill out the required fields as indicated by a red * and click "Submit."
Upon receiving your request, we'll send out your inserts free of charge as soon as possible. Once again, all we ask is that you include your new inserts in your client intake folders.
Feel free to call (800) 435-9138 or email us at info@startfreshtoday.com with any questions you may have about ordering inserts. The SFT Team is glad to help out in any way possible.
Kevin's Corner
Practice Management Tip of the Week:
"Maximizing profits means running your law firm like the business it is.
"Too often, attorneys make a significant financial investment in marketing their practices, but then neglect to collect and use the data that would tell them which of those investments are paying off.
"You may already be asking consumers who call your office or walk through the door how they heard about your practice, but what are you doing with that information? If you're not tracking those consumers and compiling reports that tell you not only which sources generate inquiries, but which sources generate inquiries that turn into clients, then you're not getting the most out of your marketing dollars—or out of the time you invest in speaking with prospective clients.
"It's not enough to know that you received ten (or two, or fifty) telephone inquiries from yellow page advertising this week—you also need to know:
- Which yellow pages, if you advertise in more than one book.
- Which ad—was it a graphic ad, a special section ad, or your regular yellow page listing?
- How many of those consumers who inquired after seeing each ad scheduled an appointment?
- How many of those who scheduled appointments kept them?
- How do the average fees from clients who found you through this marketing outlet compare to those from other sources?
"It's easy to get the impression that one form of marketing is really paying off, if you keep hearing 'I saw your ad in the yellow pages' or 'I saw you on television,' but paying off means more than just generating phone calls: it means generating business. If a marketing outlet is generating a lot of calls but few if any of those callers become clients, it's worse than a marketing effort that doesn't work at all—it means you're investing valuable time in talking to a lot of consumers who aren't likely to become paying clients.
"In next week's newsletter, we'll provide tips on how you can efficiently track the success of your marketing efforts so that you can ensure that you're making the most of your marketing dollars."
- Kevin Chern
President, Start Fresh Today
The Numbers Game
In Issue 10 of The Next Chapter, we briefly detailed proposed legislation from U.S. Representatives Brad Miller (D-NC) and Linda Sanchez (D-CA) that would allow bankruptcy judges to alter mortgages written by predatory lenders in an effort to prevent 500,000 foreclosures.
With that said, some experts have indicated that preventing those foreclosures may lead to 500,000 additional bankruptcy filings in the next two years.
The Numbers Game, Part 2
In reviewing 1700 recent Chapter 13 bankruptcy cases, Katherine M. Porter, associate professor of law at the University of Iowa, concluded that mortgage servicers frequently do not comply with bankruptcy law and often hit troubled borrowers with dubious fees.
Read Porter's report right here (simply download the document from the Social Science Research Network once reaching this page).