Credit Card Cutoffs Force Bankruptcy Options

Q: I want to start my holiday shopping, but I am completely maxed out with my house mortgage, my home equity line and credit card debt. I tried to increase my credit limit on my credit cards and home equity loan but was turned down. Should I be worried?

A: It used to be that credit was too easy to obtain. New credit cards were sent in the mail making it painless to charge vacations, clothes, meals in expensive restaurants and so on.

Businesses were offering their own national credit cards. Banks were aggressively pushing home equity loans in advertisements urging their use “for practically any purpose.” Savings and loans pitch so called “below market” introductory rate mortgages and finance companies touted personal loans with the ease of a pen stroke.

That was then. Now The New York Times published an ahead-of-the-curve October 28 admission; in an Eric Dash article headlined: “Consumers Feel the Next Crisis: Credit Cards.” As they’re squeezed by an “eroding economy.” An “already beleaguered banking industry” is threatened as lenders are sharply curtailing credit card offers and “sky-high credit lines.” Even creditworthy consumers are affected because of growing amounts of bad loan losses.

Lenders like American Express, Bank of America, MasterCard and Visa are “tightening standards (and) culling their portfolios of the riskiest customers.” Credit lines are being reduced as well, and lenders are avoiding over-indebted consumers.

Now we see higher rates, less willingness to allow high balances and less availability of loans with many needing them shut out. “The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits.

It’s seen in mail solicitations slowing to a trickle. “Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back.”

If you are over extended with debt and you are unable to make your payments due to job loss or illness, more credit may not be the answer. Bankruptcy may become an option.

Bankruptcy was intended to provide consumers with the ability to start over; it was the right of everyone under the law. The “stigma” of bankruptcy is often the creation of creditors who have every reason to make it unattractive. Big corporations, however, have not hesitated to file bankruptcy nor have many successful business people.

A Chapter 7 bankruptcy petition is referred to as a “straight” bankruptcy and is the most common form of bankruptcy. It is sometimes called “liquidation” because a debtor loses nonexempt property or its value. Illinois law specifies what property debtors are allowed to keep when they file a Chapter 7 petition.

The purpose of the exemptions is to allow the debtor to keep some property so they aren’t left a pauper after the completion of their bankruptcy. The intent of the bankruptcy act is to help debtors make a fresh economic start by discharging their debts and allow them to keep enough property to make good a new beginning. It ends creditor harassment on and off the job, hardship, anxiety and the stress associated with debt overload allowing the consumer to make a fresh start.

Roger McCaffrey-Boss is a graduate of Hamline University School of Law, St. Paul, Minnesota, and is a member of the Chicago Bar Association. You can e-mail him at RVMLAWYER@aol.com. He suggests that you consult your own lawyer for any specific questions regarding the issues raised in this column.