Forgive Us Our Debts

Explaining the rising tide of bankruptcy

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Bankruptcy rates in the U.S. have been growing for more than two decades despite generally rising levels of personal income. The most prominent explanation puts the blame squarely on credit cards, which became vastly more popular in the past 30 years. University of Pennsylvania law professor David A. Skeel, who has done the most comprehensive recent analysis of the subject, notes that a 1978 Supreme Court decision allowed credit-card companies to charge the interest rate allowed in their state of incorporation. As a result, many incorporated in the high-rate states of Delaware and South Dakota. Being able to charge high rates throughout the country, they could afford to issue cards to those with limited ability to repay. Many high-risk cardholders, overburdened with debt, filed for bankruptcy.

Skeel also notes that the impersonality of credit-card borrowing may have helped weaken the moral imperative to repay debts: in the 1960s a prospective borrower met face-to-face with a bank lending officer, but today the borrower gets credit by responding to a junk-mail offer. Another aspect of the credit-card problem is the failure of lenders to police their own loans.

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