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Digging Out of Debt? Fordham Law Works to Build a Better Shovel


In the United States, personal bankruptcy has risen from 300,000 cases a year in 1980 to more than 1 million every year since 1996. The savings rate, meanwhile, has dropped from 7 percent a decade ago to .2 percent today.

In short, more and more Americans are in debt up to their eyeballs, and the problem is getting worse.

“You can’t escape the notion that we are a nation drowning in debt. It’s one of those core issues that seems to touch everyone in one way or another,” said Tamara Draut, director of the economic opportunity program at Demos, a public policy center in New York City.

Tamara Draut speaks at the New York City Consumer Debt Working Conference: A Blueprint for Reform. Photo by Ryan Brenizer

Draut was the keynote speaker at the “New York City Consumer Debt Working Conference: A Blueprint for Reform.” The daylong conversation on Thursday, June 19 brought top policymakers, consumer law experts and industry representatives to Fordham Law.

The conference, which was sponsored by the Feerick Center for Social Justice and the New York County Lawyers’ Association, will produce a short report based on the event with recommendations for reforms and improvements.

“The general thought is that America has become a nation of debtors because of our love of flat-screen televisions and $4 lattes,” Draut said, before explaining why that notion is misguided.

She pointed to three factors that led to the explosion of consumer debt—technological advances in underwriting, deregulation of the lending industry and growing economic vulnerability in households—all of which occurred in the late 1970s and early 1980s.

“The massive rise in debt is a tale of timing,” she said. “Take away even one of these three and the debt picture in this country would look very, very different.”

The first factor, according to Draut, is technically called “risk-based pricing” but amounts to price discrimination against people who can least afford to pay for what they charge.

It began when credit card companies gained the ability to access detailed financial records for applicants quickly and easily, allowing them to assign higher interest rates to people with low incomes.

“Today, one-third of all credit card holders are paying upward of 20 percent of APR, and people of color are twice as likely to be in that group,” Draut said. “Of course, risk-based pricing wouldn’t have been able to happen without deregulation that loosened interest rate caps and constraints on lending.”

Deregulation, what she calls the second factor in America’s debt explosion, began with a Supreme Court decision that allowed credit card companies to charge interest rates based on the states in which they are located, not the states where the credit card holders live. Soon, every major card company set up shop in South Dakota or Delaware, two states that have little or no restrictions on interest limits.

Finally, more households are vulnerable to setbacks like a job loss or major medical expenses due to an increasingly unequal distribution of wealth and an antiquated social safety network in the United States.

Adjusted for inflation, income gains from 1979 to 2003 amounted to 1 percent for the lowest income bracket, 9 percent for the middle bracket, 49 percent for the top fifth and 111 percent for the top 1 percent, according to Draut.

“Where is the outrage? Why are people putting up with this?” she asked. “It’s not that people who find themselves in debt aren’t outraged and shocked. They are. But they’re isolated because we tend to view personal debt in this country as a personal problem.

“What we need is a major new social contract.”


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