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July 27th, 2009 (Modified on July 29th, 2009)

‘Ruthless defaulters’ walking away

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Some say it was inevitable. First came the wave of mortgage defaults, in which some borrowers essentially just mailed in the keys and stuck the lender with the mortgage… and the property.

Perhaps it was just a matter of time until some credit-card borrowers did the same thing:

Those on the front lines of the debt industry say there is a small but increasingly noticeable group of strapped consumers who, like Ms. Birks, are deciding they will simply stop paying. After loading up on debt eagerly provided by the card companies during the boom times, these people now find themselves trapped in an endless cycle where they are charged interest on interest and fees upon fees while the lenders get government bailouts.

They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. They could continue to pay for a while longer but instead are walking away. “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com.

The lending industry term for these people is “ruthless defaulters.” In a miserable economy where paychecks, savings and expectations are all diminished, their numbers will surely grow.

Anyone who’s been delinquent on their bills, and especially credit-card bills, knows what happens. First come the letters. When they don’t result in a payment, the calls begin. Eventually, your credit record suffers. The ‘repo man’ might even come a-calling.

But what blows me away is that these people are being seen by some as some sort of latter-day Robin Hoods:

“They’ve done the math on their account and they’re very angry,” said Corey Calabrese, a Fordham Law student who is an administrator of the school’s walk-in clinic for debtors at Manhattan Civil Court. Public sentiment is on their side, she added: “For the first time, Americans are no longer blaming the borrower but are looking at the credit card companies.”

(That’s certainly true in the mortgage crisis. According to a Quinnipiac University poll in February, 62 percent of those polled blamed lenders “who loaned the money to people who may not be able to pay it back.” Only a quarter blamed homeowners.)

Perhaps I’m unfashionably old-fashioned, but this doesn’t make sense. To me, the fact that someone else seemingly got a better deal than you (”…while the lenders get government bailouts”) is irrelevant; people are using that as a convenient excuse to claim that they’re somehow relieved of your responsibility to live up to the deal they made. One might be able to make a case that Evil Mortgage Lenders suckered tens of thousands of wide-eyed borrowers… but credit cards? You borrow money, you pay it back; rinse and repeat. if you find that you’ve spent too much, you… stop spending. It’s not complicated — unless, like the mortgage high-fliers who maxed out their equity, you suddenly find that the gravy train ride is over:

With credit cards, this type of chest-pounding seems less evident, at least so far. Ms. Birks, 43, readily admits that no one forced her to use her cards. “Some people are good with money,” she said. “I was stupid.”

Still, just about everyone made mistakes during the boom — regulators, Congress, Wall Street. If Bank of America got a bailout for making bad loans, Ms. Birks figured, she deserved a bailout for accepting them.

Even leaving aside that Ms. Birks largely wrong about that (it was Bank of America’s forced acquisition of Merill Lynch that triggered the BofA bailout), she’s off-base. She got in debt over her head — and she admits no one forced her to do so — and the only thing she deserves is a plan to pay it off.

What say you, readers? Tim may have a soft spot for (and I’ll call ‘em as I see ‘em) deadbeats, but I don’t. Am I too harsh? Read the entire NYTimes article and let me know.

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11 Responses to “‘Ruthless defaulters’ walking away”

  1. Mike Alfred Says: July 28th, 2009 at 4:01 pm

    Using the term deadbeat so broadly shows that you have little understanding of the complexity of some of these situations. Many of these so-called “deadbeats” really are the victims of a healthcare system that basically forces them in to bankruptcy. Let’s see a little more nuance. Blanket labeling everyone who gets behind on debt is not only heartless, but lacking in intellectual honesty.

  2. Second Chances | ETF Fool Says: July 28th, 2009 at 4:07 pm

    [...] Ruthless defaulters’ walking away [...]

  3. Lucia Says: July 28th, 2009 at 6:11 pm

    I’d say 80% are deadbeats, 10% are latent theives, 5% lacked previous experience with debt, 3% got in over their heads by accident, and 2% are victims of a big doctor bill. Is that nuanced enough?

  4. James McCoy Says: July 28th, 2009 at 6:27 pm

    How about people like me who have NEVER been late on a payment and recently had my CC (Chase) rate increased from about 10% to 20% for no apparent reason? These credit card companies are ruthless so why shouldn’t I be as well? I have pondered stopping my payments because of this. I have not done it yet, but the urge is increasing daily.

  5. Paul Havemann Says: July 29th, 2009 at 7:51 am

    @Mike Alfred: I thought I was clear that I was referring to people like Melissa Birks who admits she is using “lender bailouts” as an excuse to (at least consider) defaulting on her credit-card debt. What does the one have to do with the other? Nothing; it’s apples to oranges — and she admits that no one forced to to spend herself stupid.

  6. Paul Havemann Says: July 29th, 2009 at 8:03 am

    @James McCoy: I appreciate your anger, but I don’t agree that defaulting on your debt is the way to go. Like Ms. Burks, you’re grasping at an apple to justify stealing an orange. Did you use your credit card? Yes, you did. Are you obligated to pay it back? Why yes, you are, because that’s what you agreed to when you used the card. It may give you some satisfaction to stiff Chase, but weigh that against the inevitable damage to your credit score and other consequences.

    So pay it off, and if you’re still mad at Chase, cancel your card — in writing (but read this first).

  7. James McCoy Says: July 29th, 2009 at 8:27 am

    Paul,

    My problem with Chase is that I have had this card since about 1996 and have NEVER been late with a payment. And this is the thanks I get for being a loyal customer? There is simply no excuse for this type of behavior and the sooner the government cracks down on these extortionists the better. The only problem is that will never happen as the CC companies have the politicians of both parties in their back pockets. I’m literally at the point that I just don’t care anymore about my credit score (780) currently. I’m not having trouble making payments to anything…yet, but I’m also not able to get ahead. My 401K is sunk as is my IRA and I have to start saving more soon or I will have to work full time in my 80’s. Something has to give so why not let it be the extortionist CC companies?

  8. Lucia Says: July 29th, 2009 at 12:51 pm

    James, Right off I see a couple problems with trashing your credit rating. If you ever needed to rent a place to live, property managers now search your credit rating. If you lost your job, many employers now check credit histories for applicants. So you see how a simple credit card has become a multi-layered problem and keeping your credit score solid should be a priority. Good luck.

  9. Jason Says: July 29th, 2009 at 3:12 pm

    Paul,
    Yes, many of us agreed to pay back what we have borrowed and do to this day. In return the CC companies have rewarded us with doubleing if not tripling the interest rates because they are loseing money and know that us that are paying care about our scores and use that to basicly rip us off. We card holders agreed to pay back what we owe not double that so that the CC profit doubles. They are NOT holding there end up and are STEALING from those of us that have kept our end of the deal. On top of all of it they are getting given millions of what comes down to tax payers money(more of my money)to pay there own bills and you are saying I should hold up my end and continue paying them. I yesterday paid them every dollar I have ever used plus the interest I had agreed to. The funny thing is they still claim to be owed another $2400 for there rate increase(I never agreed to) a few months ago. So they will kill my 780 fico score and I know it is wrong but it is extortion @ this point and I will not pay them based on the threat to “hurt” my credit. How is the CC credit if they need a bailout to begin with,and they have the nerve to threaten me?

  10. Paul Havemann Says: July 30th, 2009 at 4:25 pm

    James and Jason,

    I understand your anger, and I am not unsympathetic. I’ve had credit-card issuers dump on me, and they quickly lost a customer. Nonetheless, I disagree because I wasn’t raised to believe that two wrongs make a right.

    That said, however, I’ve come across a post here Mish’s blog that gives me pause. It’s about people who walk away from their mortgage:

    …I always get a kick out of some people arguing that other people should commit financial hari-kari by continuing to pay a mortgage that, even if they could pay it, would swallow all their money, and leave them totally without any savings during their old age.

    Mortgages are not ethical documents, they are legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower two options: pay on time and in full, and keep paper title to the house, and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or, stop making payments, and hand the keys back to the lender.

    Morality and ethics don’t even enter the equation. Either option is perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the four corners of the pages of the mortgage contract. [Emphasis added]

    I honestly can’t disagree with the reasoning that if I pauperize myself — and worse, my family — by continuing to pay a loan I obviously can’t afford, I’d be worse than a damn fool.

    But that’s not the case here. You guys aren’t arguing that you’d bankrupt yourselves by paying your credit-card debt; you’re arguing that credit-card issuers are such pricks that they deserve to get stiffed.

    I suppose we’ll have to agree to disagree. As I said, I’ve had issuers who have tried to screw me, so I know what that’s like. (And they don’t see us as ‘loyal customers’ — wer’e marks, pure and simple.) And although none of my current cards have yet tried to stick me with their new-and-improved terms, I know that if they do I’ll threaten to cancel my card if they don’t back off — and I’ll carry out that threat if need be.

    But to default on debt that was incurred before they changed the rules is something else again. Suppose your car mechanic (or pick your own example) decides to double his hourly rate on you, his loyal customer? Does that give you the right to renege on what you owe him for past work? I don’t think I could do that.

  11. lucy Says: May 20th, 2010 at 2:29 am

    Mortgages are not ethical documents, they are legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower two options: pay on time and in full, and keep
    lucy

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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