A few years ago, when bankruptcy filings were just beginning to soar, a very experienced bankruptcy lawyer told me that I could expect to see this high volume of bankruptcy cases for about two to three years. Then the volume of filings would level off. His explanation was that borrowing, lending, and bankruptcy are like a ‘funnel’; money is loaned, some borrowers fail to repay and end up in bankruptcy.
The credit crisis that began a few years ago had more symptoms than bringing record numbers of borrowers to bankruptcy, there was also a shutdown of almost all lending for an extended period of time. Without lending, the bankruptcy attorney explained to me, there is nothing going into the funnel and, as a result, there will be less volume going to bankruptcy.
I believed him then and I’ve watched his wisdom play out as bankruptcy filings have definitely leveled off.
Credit offered to those considered subprime or risky
Debtors in bankruptcy cases have always wondered if they would ever get credit again after filing, and I believe it has always been true that high-interest credit cards and auto loans have been offered to these debtors (sometimes even as soon as they file). Those who receive a chapter 7 bankruptcy discharge are good ‘risks’ for lenders because they cannot file for a chapter 7 bankruptcy again for 8 years. So, unless a person could qualify for a chapter 13 bankruptcy, they could face 8 years of interest charges and late fees on loans they cannot repay and on which they will not be entitled to bankruptcy relief.
An article in the New York Times by Jessica Silver-Greenberg and Tara Siegel Bernard, “Lenders Again Dealing Credit to Risky Clients,” highlights this trend by creditors to lend to debtors who have “just emerged from bankruptcy”. It’s not really a new trend, in my opinion, just one that has been on hold during the worst of the credit crisis. The authors present quotes from representatives of some of the biggest lenders and banks about their new lending strategies. But the authors also raise questions of whether these strategies are “preying” on what could be considered vulnerable borrowers and whether these lending practices might be just as risky as the pre-credit crisis practices.
The ‘funnel theory’ would say that new lending, whether to creditworthy or risky borrowers, will inevitably lead to more bankruptcy cases. But ‘inevitably’ is likely to be two to three years down the road.