“Revealed preferences” is a great term from economics. It means pay attention to what actors do, not to what they say. Professor Katherine Porter has put together a fascinating study of bankruptcy and the credit industry in her new paper, “Bankrupt Profits: The Credit Industry’s Business Model for Post-Bankruptcy Lending.” She uses revealed preferences to inform the debates on bankruptcy abuse. She says, in effect, stop listening to what the credit industry says about the opportunism or moral slackness of people who file for bankruptcy. Instead, look at how the card issuers treat people who are bankrupt.
Creditors talk the talk, but do they walk the walk? Katie’s got the numbers.
It’s a great research set up: If the industry really thinks most people who file for bankruptcy are cheats, charlatans and the like, then they should avoid the recently bankrupt. Character doesn’t change. But if they really think the people who file for bankruptcy try to pay if they possibly can, then the card issuers will solicit them for new business post-bankruptcy.
Porter has the data: The credit card companies try to scoop up these families like ducks scoop up June bugs. Or, as the more scholarly Porter puts it, “empirical evidence on post-bankruptcy credit solicitation suggests that the industry sees bankrupt debtors as lucrative targets for high-yield lending.”
Either way, 96.1% of the debtors had received credit solicitations in the year following their bankruptcies — big, fat “we want to lend to you!” letters. And 87.7% of the bankrupt debtors had received offers that explicitly mentioned their bankruptcies. The revealed preferences are unmistakable: When people are bankrupt, the card companies are ready to welcome them back to the debt-fold with plenty of new plastic.
The post-bankrupt debtors are more attractive because they can’t file bankruptcy again for eight years. But if the card companies believed they were bad actors, then they should avoid these people anyway because bankruptcy isn’t the only way to avoid paying. Even at the height of the bankruptcy filings, more people defaulted on their loans and just walked away than chose bankruptcy. Barring a bad actor from bankruptcy is not the same as getting a bad actor to pay. These card companies who want to lend money must have concluded that folks in bankruptcy are not such bad actors after all.
The implications of Porter’s work echo throughout the policymaking world — bankruptcy law, debt collection, credit card regulation. The credit card companies may rail against the “bankruptcy abusers,” but Porter’s work suggests that they talk the talk, but they don’t walk the walk.
