Credit checks may be overkill for job seekers; ‘rescission’ could amount to death sentences for severed policyholders

August 14th, 2009 by Mike Hinshaw

A blogger at iStockAnalyst posted  on August 12 a pretty thorough roundup showing that the tsunami of consumer bankruptcies is not limited to the “ugly Americans” of the USA but is indeed a global phenomenon. His main point is that the binge of the “credit party” is over, and as far it is goes, the post is a quick, representative look at nations and economies as seemingly diverse as Holland, Scotland, the U.K., and Canada–and it offers plenty of links to pertinent, recent headlines.

Nevertheless, these are all statistics, alarming, yes–but still a rather chilly dataset that do not uncork the hot odor of failure. For regardless of perceptions in the other beleaguered countries, in the bootstrap-yourself, Root Hog, or Die! psyche of most U.S. workers, the simple truth is that bankruptcy stinks. True, you can find many accounts across the Web saying something to the effect that there’s so many personal bankruptcy filings now that the mere fact of having a bankruptcy on your credit report does not carry the stigma that it once did. For instance, at this in-depth post from July 19 (“The Human Side of Bankruptcy: Financial Disruption is Personal for the Millions Who File for It”), consider this passage:

“Brian Hemphill is a lawyer in Bend who did not work for the Gulicks but who specializes in bankruptcy cases. He keeps a box of tissues on his desk because clients are often in tears. Many clients, he said, feel overwhelmed and ashamed.

“I tell them, it’s not a magic wand and it can’t cure everything,” he said. “It does have a lot of negatives to it, and people have to decide, do the positives of bankruptcy outweigh the negatives? But fundamentally, bankruptcy is there to help.”

Hemphill said the social stigma attached to bankruptcy has faded in recent years as it has become more common.

Donald Trump told the New York Daily News in 2004 — during his casino company’s second voyage through bankruptcy — that there’s no shame in it.”

And it’s also true that recent unemployment figures hint that overall job loss in the U.S. may be turning around. Neverthless, a very cruel trend is emerging that spells double trouble for job seekers: the increased use of background credit checks among prospective employers is headlined “Another Hurdle for the Jobless . . .” in this August 7 report from The New York Times.

Here’s the lead: “Digging out of debt keeps getting harder for the unemployed as more companies use detailed credit checks to screen job prospects.”

And here’s the meat and potatoes: “Once reserved for government jobs or payroll positions that could involve significant sums of money, credit checks are now fast, cheap and used for all manner of work. Employers, often winnowing a big pool of job applicants in days of nearly 10 percent unemployment, view the credit check as a valuable tool for assessing someone’s judgment.

“But job counselors worry that the practice of shunning those with poor credit may be unfair and trap the unemployed — who may be battling foreclosure, living off credit cards and confronting personal bankruptcy in a financial death spiral: the worse their debts, the harder it is to get a job to pay them off.”

The article also cites a survey by the Society for Human Resource Management in reporting that “[m]ore than 40 percent of employers use credit checks at least sometimes. . . up from 25 percent in 1998,” adding that  career counselors contend that figure “has almost certainly risen today.”

Of course, anyone who’s ever run a business can sympathize with the effort to find the best employee: “Business executives say that they have an obligation to be diligent and to protect themselves from employees who may be unreliable, unwise or too susceptible to temptation to steal, and that credit checks are a help.”

But, see, right there? “unreliable,” “unwise” or propensity for theft–what has that got to do with a business decision to file bankruptcy? Where’s the two-way street? By that measure, who can do business with any of the bailout companies or the scores of businesses that have filed for bankruptcy protection?

As the article continues, “Credit counselors, worker advocates and the unemployed contend that a credit check is not always relevant to hiring decisions.

“ ‘There’s no relationship between being a personal trainer making $12 an hour’ and having a good credit history, said Janet L. Newcomb, a career counselor in Huntington Beach, Calif. ‘People are being turned down for jobs on the basis of things that really have nothing to do with qualifications.’ ”

Here’s an example: Say you’re an employer with a choice between:

  1. a recent graduate, with no roots, who bounces from apartment to apartment, never cleaning up behind and simply walking away from the deposit, and
  2. a 30s or 40s employee, with spouse and children, who’s fighting to save their home and therefore were forced to seek bankruptcy protection.

Ask yourself one simple question: Who will be more highly motivated?

The problem is the reliance on the FICO score, in which bankruptcy is a big, long-lasting hit. As summarized in the following, while national leaders are looking at major reform, perhaps this whole credit score industry deserves a long-overdue examination: “Employers say it’s a good way of picking out possible red flags in an otherwise promising-looking employee. But this continued belief in the existing credit-check infrastructure seems stupidly pro-cyclical. In the boomtimes, everyone looked like a great credit risk. Now at this point, everyone looks suspect. Maybe it’s time to put some more though thought into how we measure an individual’s creditworthiness.”

Now, here’s another double-whammy, from the health-care arena. It’s the practice of rescision, in which insurance companies can drop policy holders in the hot grease of costly medical bills and simply deny to pay all claims. Merriam Webster online defines rescinding as:

  1. “to take away: remove
  2. “take back, cancel”

Here’s how a June 17 LA Times article describes the insurance company practice: “The committee investigation uncovered several rescission practices that one lawmaker called egregious, including targeting every policyholder diagnosed with leukemia, breast cancer and 1,400 other serious illnesses. Such investigations involve scouring the policyholder’s original application and years’ worth of medical and pharmacy records in search of any discrepancies.

” ‘These practices reveal that when an insurance company receives a claim for an expensive, life-saving treatment, some of them will look for a way — any way — to avoid having to pay for it,’ said [Rep. Bart Stupak (D-Mich.)] Stupak, chairman of the commerce committee’s Subcommittee on Oversight and Investigations.”

Here’s how it works. Insurance company contracts have anti-fraud provisions, such that applicants are not supposed to lie about known life-threatening conditions, for example, AIDS or cancer. If you lie, if you try to commit insurance fraud, you should be caught–and punished, for that matter.

But what unscrupulous companies do is use those provisions as loopholes, cutting people off who forget to list innocent items on the apps–or even for not listing conditions hidden in their medical records, unknown to them. Here’s some example from a repost of another LA Times article: “A Texas nurse said she lost her coverage, after she was diagnosed with aggressive breast cancer, for failing to disclose a visit to a dermatologist for acne.

The sister of an Illinois man who died of lymphoma said his policy was rescinded for the failure to report a possible aneurysm and gallstones that his physician noted in his chart but did not discuss with him.”

The practice of rescission “was largely hidden until three years ago, when The Times launched a series of stories disclosing that insurers routinely canceled the medical coverage of individual policyholders who required expensive medical care.”

Apparently, once the practice came to light, Congress got interested and held a hearing in June. From The Times’ coverage and the hearing testimony, a particularly nasty item came to light. Despite insurance execs’ denials of bonuses for employees who rescind thousands of policies, “[o]ne employee, for instance, received a perfect 5 for ‘exceptional performance’ on an evaluation that noted the employee’s role in dropping thousands of policyholders and avoiding nearly $10 million worth of medical care.”

The jaw-dropper in all this is the response of three insurance execs who testified at the hearing.

“Late in the hearing,  Stupak, the committee chairman, put the executives on the spot. Stupak asked each of them whether he would at least commit his company to immediately stop rescissions except where they could show ‘intentional fraud.’

“The answer from all three executives:

” ‘No.’ “

Then Rep. John Dingell (D-Mich.) tied the discussion to the need for health-care reform. He “said that a public insurance plan should be a part of any overhaul because it would force private companies to treat consumers fairly or risk losing them.

” ‘This is precisely why we need a public option,’ Dingell said.”

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Many of us can not wait for our leaders to fix the foreclosure/credit card/health system fiasco. Experts agree that if personal bankruptcy is your best option, the sooner you get counsel from a qualified attorney, the better. Here’s some online resources:

An overview from The New York Times.

An introduction to Chapter 7.

An introduction to Chapter 13.