Five Consumer Credit Trends to Watch for in 2013

Credit Card Companies Enter New Year Targeting Debtors

Will the economy’s bad luck turn around in 2013? Fiscal cliffs, debt ceilings, slow job growth and consumer anxiety are all proving to be major barriers to the long-awaited economic recovery. Analysts are tilting toward optimism, but predicting what will happen with the economy is risky business. One key indicator may be the consumer credit sector. Americans are now carrying nearly $3 trillion of consumer debt, a record high. But there’s mixed news in that number. Credit card debt has actually dropped in recent years, all while student and auto loan debt has soared. Morgan Drexen spoke with several attorneys who specialize in consumer credit issues, including bankruptcies and debt settlement. These are the attorneys who assist people at their lowest financial point. Here are the top five consumer credit trends they see heading into 2013.

1. Creditors Suing for Small Amounts

Credit card companies are not afraid to sue their customers over outstanding balances who are not represented by an attorney. It happens all the time. In fact, the New York Times recently exposed some of the questionable tactics creditors use to recoup their losses. What’s changed, according to California attorney Timothy Reed, is the amounts creditors are now suing for.

“I’ve seen a lot more lawsuits for a lot smaller numbers,” says Reed. “I’ve seen lawsuits for less than $2,000 dollars. That’s extremely surprising to me. Ordinarily that wouldn’t even be a small claims suit.”

Nebraska attorney Kirk Goettsch says he’s shocked not only at the amounts creditors are suing for, but how quickly they’re doing it.

“Lawsuits are being filed regularly against [consumers] who are behind [as little] as 60 days!” says Goettsch. “Often by the time we’ve gotten to the point where they’re coming to see me, many options aren’t even there, because the creditors have already gone past that – some have already filed suit. Some may already have judgments against them.”

The move to go after consumers for lower amounts may be the indirect fallout from the federal credit CARD Act of 2009. The legislation was aimed at protecting consumers by limiting interest rate hikes and providing strict guidelines on credit terms, fees and collections. Analysts say the law has been effective in limiting certain abuses, but has also prompted credit card companies to dig into their couch cushions for more revenue. Suing more people for smaller amounts is part of that effort, and it’s likely to continue in 2013.

2. Debt Collectors Getting More Aggressive

Credit card companies like to outsource their dirty work. Enter the debt collectors. Debt collection agencies usually earn a fraction of the overall amount owed, so it stands to reason they will be aggressive in going after that money. Although there are limits as to what they can do or say, some debt collectors ignore the rules. Oregon attorney Erik Graeff says debt collectors have sharpened their game.

“They seem to have a better feel for who they can bully,” says Graeff. “Somebody who’s unrepresented; somebody who is a little less sure with regards to their rights and their debts. Collections and creditors have really developed their techniques in these last four years of really hard times. They’ve really developed even nastier techniques than they used before.”

Tennessee attorney Raven Perry-Beach agrees.

“I’ve heard clients go so far as to say ‘oh this creditor contacted me and said oh I’m gonna be hauled off to jail.’ There’s no debtors prison,” says Perry-Beach. “You won’t go to jail for not paying your debt.”

“Bankruptcy filings have been expanding so more and more people are walking away from debt,” says Indiana attorney Neil Waechter. “And as people struggle, it’s become harder and harder for creditors to squeeze money out of clients.

These creditors have become a lot more aggressive.”

Expect the big squeeze to continue in the new year.

3. More Bankruptcy Filings

In 2005, Congress passed a series of rules aimed at making it harder for consumers to file for chapter 7 bankruptcy. The law’s passage led to a record number of bankruptcy filings as consumers scrambled to beat the law’s enactment. Because Americans are allowed to file for bankruptcy every 8 years, Erik Graeff expects filings to tick up in 2013.

“In ‘05 there were major changes made to the bankruptcy act that made it a lot harder to file for bankruptcy. So what we’re seeing is it’s 8 years later, and all those people who went into a rush to file before those harsh ‘05 amendments got put into the law are coming back. Lots of them will have to file again.”

Kirk Goettsch also sees bankruptcies edging up.

“I like to be optimistic, unfortunately I don’t see a whole lot of reason to be optimistic. Tax laws are going to be changing, it’s going to be more difficult for middle income families to survive. Things are going to become more expensive. Health care is going to be more expensive. And the simple fact is, families carrying large amounts of debt now are going to have an even harder time surviving when their basic expenses for living are going to continue to go up.”

4. Bankruptcy, Debt Resolution Not Just For the Poor

Another eye-opening trend is the changing demographic makeup of those seeking bankruptcy and debt resolution services.

“As the economy has struggled, the type of person that has come in has become more affluent,” says Waechter. “In the initial stages of the recession, it was young people, people that didn’t have a lot of resources. Now I’m seeing clients that are making $130,000 or $140,000 a year.”

Reed has also lent his bankruptcy services to wealthy clientele.

“I had one client, they made a collective 6-figure income and they filed for chapter 13. How they got into it was overbuying properties. They owned houses in Sacramento, houses in Arizona. All the mortgages were adjustable rate mortgages – and they all adjusted. Suddenly their $2,000 house payment became a $4,000 house payment, and then they lost a renter or something. They got in during the real estate boom and everyone thought it was going to last forever, and it was not going to last forever.”

5. The Next Bubble: Student Debt

As the crisis surrounding credit card debt has begun to subside, a new bubble has emerged: student loan debt. According to estimates, there is roughly $1 trillion in total outstanding student loan debt in the United States today. The average college student is graduating with approximately $25,000 in student loan debt.

“I think that the student loan bubble is really a big issue right now,” says Waechter. “People that have decent jobs but are also burdened by this debt. And student loans are a completely different issue than the credit cards, that’s a completely different beast. But what they have done is caused people to start taking out credit cards and personal loans and extending themselves further and further financially just trying to meet their debt service to the student loans. So I think that you’re going to see a lot more young people that are highly educated trying to come in and say ‘I don’t know what to do with this any more, I don’t know how to fix this, my student loans are killing me.’”