An end run around bankruptcy law:
Subprime credit cards are reaffirmation by another name
By Lynda Edwards • Bankrate.com

Fearing reaffirmation might be outlawed, banks, collection agencies and telemarketing firms created the strange, murky universe of subprime cards.

"It's reaffirmation in disguise, a way of doing an end run around bankruptcy court supervision," says Philadelphia lawyer Tobey Daluz, a bankruptcy expert.

Given the surge in bankruptcies, subprime cards are a boom industry. According to bankruptcy experts, subprime salesmen can make the driven dealmakers of Glengarry Glen Ross look tame. 

A subprime salesman contacts a Chapter 7 debtor with big credit card debt on behalf of the bank or collection agency, offering a ray of light -- a brand-new card. It's called a subprime card and its designed for decent debtors in dire straits. The debtor must transfer the old debt onto his new subprime card and pay it in installments with an annual fee, normally $75, and interest rates of 18 percent to 21 percent. Subprime salesmen target debtors terrorized by collection agencies boasting scorched-earth tactics; the debtor is so grateful that the subprime pitchman is friendly, he's an agreeable mess.

"The Nilson Report," a credit card industry newsletter, notes that 50 percent of the subprime telemarketer's profit comes from cross-selling auto loans, cellular phones and long-distance services to the debtor. These seem like the last things that a bankrupt, low wage earner needs. But subprime salesmen often convince him extra charges will rehabilitate his credit rating.

"We can't clean up the industry abuses, but we try and keep our system clean," says John Cahill, president of the subprime lender TeleServices. His agents negotiate repayment of 70 percent to 80 percent of the debt. When the consumer makes three monthly payments, TeleServices notifies the credit bureaus that the debt is discharged. "If they can handle three payments, we refer them to an allied bank, which decides if they can have a secured card. There are people who psychologically, as well as financially, should not have credit cards."

Not everyone in the burgeoning industry is so scrupulous. Because, technically, the negotiation is for a new credit card, not a reaffirmation, no bankruptcy court monitors subprime transactions.

"I have poverty-stricken clients who get mailings advertising subprime cards the minute they file Chapter 7," Daluz says. "That is not a rescue."

-- Posted: Oct. 2, 1998