The 1.3 Trillion Dollar Credit Card Problem

The statute of limitations is the time frame in which a case has to be filed in order to be valid. Because of COVID-19, not only did credit card balances increase, but creditors are facing a time crunch with the statute of limitations. As a result, more creditors are filing collection lawsuits, increasing bankruptcy filings.

Key Points:

• Household credit card debt tops 1.3 trillion dollars, the highest ever.
• With the statute of limitations coming up from the COVID-19 era, more lawsuits and bankruptcies will be filed this year.
• Creditors offer more flexibility these days on payments, including forbearances.

The 1.3 Trillion Dollar Credit Card Problem

The Federal Reserve of New York recently published that credit card debt is 1.3 trillion, the highest we have seen since 2003. But what does this mean for you, and how did we get here?

Besides the obvious ebbs and flows of life, including financial ones, I consider the COVID-19 pandemic a hidden factor. I know this was four years ago, so let me explain how this is a factor now.

Screenshot: Federal Reserve of New York Consumer Credit Panel/Equifax

The COVID-19 Effect and the Statute of Limitations

During the coronavirus pandemic, it was common for creditors to grant forbearances on debt payments. A forbearance means that the creditor agrees that no payments are due during a specific period. Interest may continue to accrue during that time, but at least the payments stop for a while, giving debtors breathing room financially.

Forbearances, no doubt, were a lesson learned from the 2008 foreclosure crisis, where creditors were not flexible with mortgage payments, resulting in massive defaults on mortgages and other debts.

Trying to avoid repeating history, creditors now routinely grant debtors forbearances, sometimes even without the debtor asking for it. Look at how things have changed since 2008; if a natural disaster occurred in your area, such as a hurricane or tornado, you will likely get an e-mail or text from a creditor saying it’s okay to skip a payment for that month.

Veteran Foreclosure Assistance Program Slashes Mortgage Payments to 2.5%

My student loan lender emailed me asking if I wanted a 90-day forbearance period after a hurricane last year. Does this mean creditors are considerate, kind, and empathizing with your situation? I doubt it.

Trust me, when a debtor passes away, and a probate case is filed, guess who is the first to file a claim against the estate to collect on the debt?  You thought that death meant you escaped debt? Sorry, it doesn’t. Even in my bankruptcy law textbook, the first chapter focuses on the history of bankruptcy law, and I discuss how, at one point, creditors would seize a corpse to force the family to pay back the debt.

Creditors were ruthless then, and they are ruthless now.

With forbearances, it’s clear to me that creditors learned from their mistakes. But if you are a jaded, skeptical bankruptcy lawyer like myself, my answer is that it comes down to dollars and cents. The first rule of law is don’t waste your time suing anyone who doesn’t have money. Why bother? It’s a waste of time. Spending $2.00 to get $1.00 back is never a good business model.

In our business, if a creditor gets a judgment against someone who cannot pay, we say the piece of paper the judgment is written on is worth more than the actual judgment.

So, during the COVID-19 pandemic, creditors weren’t filing lawsuits because the country, if not the whole world, was shut down, putting the brakes on the global economy. If a debtor isn’t working, there are no wages to garnish, so there is no point in suing them.

So now, four years later, what happened? Who knows how many people have yet to recover financially after COVID-19? The number of clients I deal with each week that have businesses that took a hit kept borrowing to keep their doors open, and now have reached the point where they need to close down is scary. Or maybe it’s a spouse earning less post the coronavirus pandemic, and now bankruptcy is more than a passing thought because their credit cards are maxed out.

Time is Ticking

With credit card debt at an all-time high, more bankruptcies will likely be filed this year and in the next few years. Business bankruptcies (Chapter 11) are 72% higher than the year before, and personal bankruptcies (Chapter 7 and 13) are 16% higher, and I believe it’s because creditors are running out of time to file their lawsuits.

• Bankruptcy Filings Go Up

The Statute of Limitations is Here for Creditors

The statute of limitations is the maximum time a lawsuit can be filed. For example, most states require that a lawsuit related to debt be filed within four to five years. If filed after that time, the lawsuit will be dismissed, which is where we are today. The coronavirus pandemic was in 2020, and we are now in 2024. Tick. Tock.

Creditors are facing a time crunch; there’s no more time to lose, so before the statute of limitations expires, they file their lawsuits, and in response, we see a spike in bankruptcy filings.

What Happens Now if a Creditor Sues Me?

I can only answer this question with two distinct approaches: the legal approach and the nonlegal approach. Both are equally important.

The legal approach is simple. Filing for bankruptcy may be the answer or a settlement can be reached with creditors. Either way, financial issues can always be resolved. This includes options such as refinancing your debt with personal loans. But what are the nonlegal actions?

I know it’s easy to stress out over debt. I’ve been there, done that, but I couldn’t afford to get the T-shirt. Creditors are calling all day. Endless emails and text messages, and even snail mail to remind you that you are past due on your payment. Like you don’t know! Even in my textbook, I wrote about the direct link between financial difficulties and divorce and studies showing a direct link between an increase in antidepressant use and suicide during economic recessions.

But if there is something I know, you will get through this. I can prove it easily. There is strength in numbers. How many people are and were in the same situation as you? How many over the last ten years? What about in the previous 20 years? You can even add me to that list. And yet, we’ve all gotten through this, and so will you. If they made it and I made it, so will you.

What Happened to Dollar Tree and Family Dollar Store?

I know it’s easier said than done, but chances are you have been through difficult situations before. You have to remind yourself that you can handle this. I once asked a real estate developer friend how he could stay so calm as the mortgage foreclosure crisis was in high gear.  I wasn’t calm!

Several nights each week, I was riding my motorcycle late in the evening to the middle of nowhere to clear my mind, getting home past midnight, if not much later, and I was earning a good income then.

His response put it in perspective for me. Losing millions of dollars was much easier the second time around. Think about that profound statement. My friend didn’t say he was accepting this as his fate. He wasn’t saying he was happy with his situation. He wasn’t saying he was going to give up. All he was saying was that he had been through this before and that he would get through this again. The third time is the charm.

So now apply that mindset to yourself. If this is your first time dealing with financial issues, you are young, out of school, and facing a mountain of debt with student loans; trust me, I understand, and believe me, you will get through this. I know you will. So whether it’s my clients or the endless people who have faced difficult times, whether financial or otherwise, you’ll get through this.

Remain positive, stay healthy, and make sure to deal with the stress in a positive way.

Do you have a question regarding credit card debt? Email at alex@bankruptcy.blog.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

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