Will credit card debt be the next mortgage crisis?

The East Bay Community Law Center in Berkeley has provided free legal services to indigent clients since 1988. In the past, they’ve dealt mostly with people seeking help with housing and healthcare issues. Lately, however, as the economy has gone south, attorneys at the Center have noticed more and more people, many middle class, coming into their office because they’re being sued by collections agencies or credit card companies. KALW’s Rina Palta sat in on the Center’s first consumer debt clinic. A note to our listeners and readers: we've changed the names of the center's clients in this story to protect their privacy.

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RINA PALTA: Last Saturday Denise Jones woke up to a loud noise.

DENISE JONES: Someone came to the door, banging on the door at 6 o’clock in the morning. He’s got his lights on, I thought something happened to one of my kids, you know.

It turned out the man was there to hand her a summons. Jones was being sued by a collections agency, which, a few years ago, she never would have expected.

JONES: My husband and I both have really good paying jobs.

They’re both electricians.

JONES: Together, we make well over $150,000. But we lost our jobs. And I haven’t worked since September of 2008 and he hasn’t worked since January of 2009. And we used the credit cards to keep the monthly bills going. But it only works for a certain amount of time.

$50,000 of credit card debt later, Jones and her husband started getting letters from a collections agency.

JONES: And the calls. Like every single day, three or four times a day. Every time you call they ask you again, “Why you didn’t make the payment?” My pride was wrapped up in the fact that our credit was good. We’re the perfect consumers and this happened, and now we’re not. And we need help. We need someone to understand that these are not your average circumstances.

Now, Jones is at the first consumer debt clinic at the Alameda County Superior Court, operated by the East Bay Community Law Center. Volunteers who are students at UC-Berkeley’s law school meet with each client one on one to discuss their debt.

 Megan Ryan is a supervising attorney at the clinic.

MEGAN RYAN: I would say the majority of our clients that come in with credit card debt have had some crisis affect them. They’ve lost a job, they’ve had a home that’s been foreclosed. They’ve had some kind of healthcare crisis. And they’ve been trying to make ends meet on their credit card bills. And they’re no longer able to pay on their credit cards, so the creditors are coming after them to get paid.

In 2009, uncollectable credit card debt reached record levels. According to Fitch Ratings, a company that evaluates credit card markets, credit card companies determined that one out of every eight dollars owed to them in November would never be paid. The massive amount that credit companies are writing off as lost has spurred some speculation that credit cards debt will be the new mortgage crisis. Martha Olney, an economics professor at Berkeley, says those concerns are overblown. 

MARTHA OLNEY: When we have a mortgage crisis, that has to do with 90% of the money that folks owe. And when we have a credit card crisis, that has to do with 5% of the money people owe. So I want to give a sense of the proportions here.

Olney says that credit card debt will continue to be a huge issue for some families, but it won’t have a large effect on the overall economy. But she says the economy might be affecting how willing credit card companies are to work with clients who can’t pay.

OLNEY: The banks are going after people more because they have more people to go after, basically. I suppose in a time when they can write off the losses without taking a massive hit to their bottom line, banks are likely to behave differently than when the losses become so large that they can’t write them all off without the bottom line being impacted. And that’s kind of the situation that the banks are in now. They’ve got headaches from the mortgages, they’ve got headaches from the credit cards, and we haven’t even talked about commercial lending.

When a bank decides that a person just isn’t going to pay, but needs to recoup their money, they can hire a collections agency. Or they can sue the credit card client. Or they can sell the debt to a collection agency for a fraction of the actual amount, and the debt collector can pursue the credit card holder.

RYAN: And people come in and say oh my god, who is this person? I never had a card with them. Who is this person? Who’s suing me?

Ryan says having a collections agency suing you can be even more confusing. She says these agencies often engage in harassment.

RYAN: We’ve had a case where the creditor threatened the mom of the debtor that if she didn’t pay $1,000, her son would be arrested. That is not correct and that is not right to say. We’ve had people tell elderly clients that they’ll take their social security money, that they can garnish their social security money if they don’t pay. Which is also is not true.

Even if a company can prove that a person owes them money, there are still options. Like negotiating a settlement for a lesser amount, or working out a more reasonable payment plan. As for Denise Jones, a law student helped her fill out her response to American Express’s lawsuit.

JONES: She also suggested that since our debt is so high, that bankruptcy might be a possibility. Which I don’t know about that yet because I’ve been in bankruptcy before and it’s not fun.

A couple of tables away, Ann Schmidt, another client, is also trying to avoid bankruptcy.

SCHMIDT: Nobody sent me a summons, nobody is suing me. I’m only a couple months out and I’m trying to get the bank to work with me but they won’t. At this point, I don’t have enough to eat or drive my truck.

A law student at the clinic called Schmidt’s credit card company for her, but they couldn’t work out a payment plan that she can afford on her income.

SCHMIDT: The biggest thing that I see is that the banks knew I was on social security when they gave me the card. They knew that I was on social security when they raised the limit. And then they just won’t work with me.

Schmidt says her social security checks have been cut by 10% for the past six months, and now she’s broke and considering bankruptcy.

SCHMIDT: I graduated at the top of my class. First in 40 years to graduate from my college with a perfect GPA. I’m not stupid and I’m not lazy.

Schmidt and other are just in need of some help. In Oakland, I’m Rina Palta for Crosscurrents.

The East Bay Community Law Center will host the consumer debt clinic every Monday, from 1:30 to 4pm, in room 240 at the Renee C. Davidson Courthouse.