Overwhelmed by more than $60,000 in debt, Lenya Garcia filed for bankruptcy protection last July. In January, her case was completed and her debts -- mostly on credit cards -- were dismissed. Less than a month later, a rash of new credit card offers began arriving in the mail.
"I was very surprised," said the 36-year-old Bronx bookkeeper. "I figured my credit history had a big smear on it, and it would take a long time to get credit." Initially Garcia threw the offers away, but then she had a hard time renting a car without a credit card. So she took the next good "preapproved" offer -- 14.9 percent interest and no sign-up or annual fee -- and signed up at the company's Web site.
"I was approved instantly."
Bankruptcy attorneys say Garcia's experience is the norm for debtors emerging from bankruptcy. "I tell my clients they will be inundated with offers," said North Carolina attorney T. Bentley Leonard. The reason is simple, he said: This group of consumers is a very attractive market to lenders because their debts have been wiped out and new debt cannot be forgiven for another six years.
"One day they owe $50,000, the next day, nothing. What better person to lend money to?" Leonard said.
That's certainly the pitch of one database firm, NewLeadsUSA, which sells lists of bankrupt consumers and businesses from publicly available data. "Opportunity knocks after life's hard knocks," the NewLeads Web site says. "Bankruptcy means a new financial life for many businesses and consumers. Be among the first to reach this unique and lucrative market."
Most of the offers are extended to consumers who have filed for Chapter 7 bankruptcy, which allows them to erase most of their debts. But attorneys say frequent solicitations also are made to consumers who have filed under Chapter 13, which requires some repayment of creditors and restricts new debt.
Consumer advocates say these offers could increase under a new bankruptcy law approved by the House yesterday by a 302 to 126 vote. The measure, already approved by the Senate, would make it more difficult for consumers to wipe out their debt through Chapter 7 bankruptcy. White House aides have said President Bush will sign the measure pushed for nearly a decade by credit card and retail industries. Proponents say the changes are needed to end abuses by people who shirk their financial obligations.
Dangling temptation
Under the legislation, debtors who file for Chapter 7 bankruptcy court protection will not be able to get any future debts dismissed for another eight years. That in itself will make filers a more attractive target for credit solicitations, said John Rao, a staff attorney of the National Consumer Law Center, one of many consumer groups that fought the bankruptcy bill. "The problem is that credit card companies will have an even greater incentive to encourage recent bankruptcy filers to incur new debt, knowing that this debt will be safe from any possible bankruptcy discharge for a longer, eight-year period," Rao said.
The solicitations concern bankruptcy attorneys and judges who worry that the credit industry is irresponsibly dangling temptation in front of people who may be desperate for it. "It's like putting a steak in front of a starving man and saying, 'Don't touch,' " said Brett Weiss, a bankruptcy attorney in Olney.
"It is very disturbing," said one federal bankruptcy judge who spoke on condition of anonymity because she regularly deals with debtors and creditors. "People should exercise responsibility and discretion, but I also believe banks should exercise discretion and responsibility in the manner and to the population they offer credit."
The banking industry says it is not specifically targeting bankrupt consumers, but merely offering access to credit to a wide spectrum of potential customers. "Just because someone files for bankruptcy doesn't mean they should be denied access to credit, nor does it mean that they cannot handle a credit card," said Tracey Mills, spokeswoman for the American Bankers Association. "People file for bankruptcy for many reasons, including job loss, divorce" and medical bills.
On its face, bankruptcy "doesn't warrant credit suppression," said Alan Elias, spokesman for Providian Financial Corp., which bankruptcy attorneys say is one of the more aggressive credit card solicitors. "A lot of people who come out of bankruptcy are actually pretty good credit risks," he added.
Capital One, another active solicitor of bankrupt debtors, said it does not have a product specifically designed for someone who has gone through bankruptcy. However, spokeswoman Tatiana Stead said, "we are a full-spectrum lender" offering products to customers of all sorts of financial means, including those who may have declared or are emerging from bankruptcy. Of course, she said, consumers with blemishes on their credit histories may be charged higher interest rates and fees. She declined to give specific product details, saying they are proprietary.
According to a yet-to-be-released survey of 356 debtors who filed Chapter 7 bankruptcy in 2001, 96 percent reported that they had received offers for credit cards, car loans, mortgages and other credit in the year after their debts had been discharged. Of those, half said they received at least 10 solicitations a month, said Katherine Porter, a University of Nevada at Las Vegas law professor who conducted the survey with a team of other researchers as part of the Harvard-administered Consumer Bankruptcy Project, which studied bankrupt families. Nine out of 10 respondents said at least one of the credit offers specifically mentioned their bankruptcy or financial difficulties.
And 23 percent said at least one of the offers came from a creditor who was part of their bankruptcy case and to which they had previously owed money. "Here are these lenders saying bankruptcy is so bad, debtors are so immoral. How bad or immoral can the lenders really think these bankrupt families are if they are offering to lend to them again?" said Porter.
In spite of these solicitations, Porter said, 75 percent of those surveyed reported that they had accepted no new credit offers for approximately one year after emerging from bankruptcy court protection.
High fees
Bankruptcy attorneys say that immediately after debts are discharged, lenders come calling. "It's a very common occurrence," said Texas attorney Alvaro Martinez, who recalls a couple whose debts were discharged in January. The discharge occurred on a Monday; by Thursday, a large national bank had granted a $70,000 mortgage to the couple, Martinez said.
Some of the offers come at a premium. First Premier Bank, which markets cards to many post-bankruptcy consumers, charges fees of about $175 for a limited initial credit line of $250 to $350, said Miles Beacom, president of Premier Bankcard, the bank's credit card affiliate. There are two one-time charges, a $29 account setup fee and a $95 program fee, an annual $48 fee, a monthly $6 participation fee and a $25 fee every time the credit limit is increased.
Beacom said his firm's core market focus is subprime borrowers, or those with risky credit. "Our real focus has been to help individuals reestablish their credit," he said. The fees may seem high, but they are comparable to high-risk car insurance. "Our customers have had speeding tickets and accidents, but with their credit -- so they have to pay more upfront to prove they are good, consistent customers." Once they have a proven track record, they can easily obtain other credit at lower costs, he said.
The high fees, Beacom added, have not deterred consumers from applying. Monthly, the company gets about 350,000 inquiries and issues cards to only about half of those who apply. "There's a real need here. . . . These individuals want to reestablish their credit," Beacom said.
The availability of credit stuns some bankruptcy attorneys, including Denice Patrick of Linwood, Wash., who filed for bankruptcy protection two years ago for her mother, Charlene Genardi. Her 74-year-old mother's only source of income -- then and now -- was about $750 a month from her Social Security check.
"The week of her discharge she got five separate card offers in the mail," said Patrick, whose mother lives with her. "I was astounded. Many of them I threw away because I didn't want her to see them." In January 2004, Genardi filled out an offer for a Capital One card -- a $500 credit limit with 9.9 percent interest. "I didn't think she'd get one, given her income and bankruptcy," Patrick said. But she did.
Garcia's offer also was from Capital One, for a $1,000 credit line with no start-up fees.
Garcia was reluctant to apply. "I didn't want to get caught up in trouble again," she said. But, she decided, "there are just some things you need a credit card for."