Way back in May, I’d wondered if allowing consumers the ability to pay their mortgages with a credit card was really a good idea — or if it was merely allowing troubled consumers the ability to rack up mountains of debt before heading into bankruptcy. I’d revisited the subject in September when a company called CardIt began touting credit card-funded mortgage payments to nearly every major lender (for a hefty fee, of course). With stories like this one, published today by the AP, it looks like I had good reason for concern:

“We fell behind (with the mortgage) and twice we agreed to new repayment schedules that didn’t work out,” said the 31-year-old, a compliance officer at a small bank on Chicago’s blue-collar South Side. “It’s been a lot of stress. But this time, if all goes well, we should be able catch up.” In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 — higher than they planned on, especially with her husband’s furniture sales job largely commission-based and business not good due to the U.S. housing slowdown. An attempt this spring at refinancing with another lender fell through, leaving them behind on payments and struggling. But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has “maxed out” all her credit cards, spending to the limit on basic needs. “Now all I’m doing is making the minimum monthly payments.”

I don’t think stories like this are one-offs; I think borrowers on the margin are doing this in droves, and all are hopeful that their circumstances will somehow change and that they’ll be able to pay down card after card of “maxed out” consumer debt. The Reeves have already twice failed a loan workout, because they simply can’t afford their mortgage — and that won’t change after six months of maxing out credit cards. It shouldn’t be any wonder to see credit card companies upping loss reserves this quarter, as a result:

“When credit conditions dry up, marginal borrowers turn to plastic,” said Merrill Lynch North American Economist David Rosenberg. “We’re seeing signs of that already.” In an October 5 research note, Rosenberg called rising credit- card delinquency rates as the “next skeleton in the closet.” It is one scary skeleton — and a specter of bankruptcy. The problem with using credit cards — with their high interest rates — to stave off default brought on by “reset” adjustable mortgage interest is that it merely postpones an inevitable crisis, said Gregary Brown, social policy director at Metropolitan Family Services in Chicago. “Our biggest concern right now is that there are lot of people who will face a choice between bankruptcy or foreclosure,” he said. “Either way, it’s going to suck.”