Bankruptcy Myth 08
Filing Bankruptcy is somehow “Cheating the System”
Remember when you applied for those credit cards? When you applied for credit card, the bank assigned you to a certain “Risk Pool” based on your credit profile. Tens of thousands of individuals were also assigned to your same risk pool.
The credit card issuer, of course, had no way of knowing who in the group would file for bankruptcy. But they did know that a certain percent of the people within each pool would default on the loan and file bankruptcy. In fact, they were able to predict quite accurately (using sophisticated computer modeling and statistical analysis), the default rate for the group as a whole. Armed with this knowledge, they charge the group as a whole a “risk premium” in the form of higher interest rates.
Each time they collect a payment from a cardmember, they simply set-aside the risk premium portion into special reserve account used to cover bankruptcy losses. Therefore, when someone files for bankruptcy, large commercial lenders don’t agonize about it, they simply transfer funds from the reserve account to cover the loss.
Almost everyone agonizes over not being able to pay their debts. But if you have ever paid money to a credit card companies, a finance company or a bank, you have helped fund reserve accounts to cover the losses.
To your creditors – at least to banks and other sophisticated institutional lenders, bankruptcy is not a moral decision. It is a business risk they studied, planned for and eagerly accepted. Given the rates the credit card companies charge and the shameless tactics they use to lure customers, they are in no position to raise moral objections.
