Although I agree with the cause and effect - and I can rant with the best of them on "irresponsible behavior that led to our current economic crisis by banks, the government, and individuals," you can't get blood from a stone. If they have seen two good incomes go down to one barely above Florida's low unemployment compensation check and are, as seems likely - upside down in their mortgage - they may not have a lot of options.
I'd try hard to avoid bankruptcy and foreclosure, but I suspect that at least one or the other is on the horizon for them if things are as tough as she portrays them - possibly (and probably) both if a job for her doesn't appear quickly. She's decided to try and keep the foreclosure wolf at bay by inviting in the spectre of bankruptcy - not an unreasonable decision for someone with a family.
Its clear you and blondietink are under some huge misconceptions on the credit market actually works. I say this because of the simplistic black and white explanation offered by blondietink and you seem to agree with. This is a complex matter with shades of gray... not some simple black and white issue.
Consumers have defaulted on credit, been late with payments, etc for decades. It is a SMALL component of the whole financial mess that we are in... it is but one of MANY MANY MANY factors causing this problem.... a perfect financial storm. If the other factors weren't present, then your rates would not go up (maybe).
First of all, rates go up for 4 reasons in these cases... 1) THe fed raises rates (not the case right now) 2) The criteria for risk has increased due to all the stuff from last Sept-Oct... even if you have good credit... maybe because the amount of debt you have or your income, whatever, but due to factors you can control, the CC companies felt you are now a bigger gamble and bumped you up. 3) 2 is a part of it, as is three. The big problem was the large banks and investment houses who were able to buy up debt (your home loan, your school loan, etc) in ways that were extremely risky with no oversite or regulation. That debt is traded just like gold, silver, stocks, bonds, etc. Because of the lack of regulation, the banks and investment companies who bought this debt got over extended. Now as the balloon payments on mortgages became due for a lot of homeloans, foreclosures started happening. Yes, these people bought homes they couldn't afford because hyper agressive mortgage brokers pushed them heavily into it. That and the fact that there was no real regulation of the industry started the ball rolling. Had those Balloon payments, Interest only loans, etc been either not allowed or regulated, this might have been prevented. The invest house and banks who had bought this debt like Lehman Bros, Like AIG, etc and over extended themselves (Like a gambler who hits a lucky streak, bets it all plus his life savings and rolls snake eyes) start to fail because of all this mounting worthless investments. A few early ones were bailed out... THEN we come to Lehman Bros. Lehman Bros failing really was the straw that broke the camel's back. While many banks were tightening up their lending, when Lehman was allowed to fail, many of the big banks shut down lending all together. If banks don't lend, then businesses who rely on that money to subsidize until cash flow comes in, all of a sudden don't have that well to rely on. For example, with my business, I had a line of credit that I used to pay payroll and other expenses and then would pay off when the receivables came in. Those businesses went under or laid people off. Laid off people can't afford to pay their debt and then declare bankruptcy or don't pay. Same with the businesses. So the credit card companies are afraid to lend out money, just like the banks... they raise rates in light of their new increased risk and to hopefully generate additional income. Ironically, this makes matters worse and a FREEZE should have been placed on interest rates, but that didn't happen because the CC and Bank lobbyists have a lot more money than we the people do. The new credit card reform bill will help, but not in all the ways it needs too and not until 2010.
This was the reason for the bail out money... Give the banks an influx of cash so they would start lending again, which starts the wheel turning.
As you can see, its not as simple as people not paying a $35,000 debt because they can't afford it. That's not why your rates rose... rather its a sympton, just like them not being able to pay. The fault for this really goes back to Greenspan who was very anti-regulation and never properly regulated the mortgage market, allowing the big real estate boom, but also allowing this mess to happen. Its not solely his fault... the;s just the lynchpin.
l
This is the SIMPLISTIC explanation, BTW. As I said, this is not just black and white. There are MANY MANY detailed explanations on the web... try Paul Krugman, Dean Baker, Joe Stiglitz... Krugman and Stiglitz are Nobel Prize Winners. They will REALLY go into nuts and bolts. Both Dry, but interesting.
Now, I do carry some credit card debt, but always pay more than the minimum owed. So, because of this and the fact that my balances are declining because I am not charging, I'm paying more the the minimum due and people are defaulting right a left on their credit card balalnces, I have got to pay the price for being good managing my debt. I am not picking on the OP only, as my now deceased father-in-law racked up thousands of dollars of debt on credit cards, never paid on them and figured that somebody else would pay them. Well, he died and now they are trying to collect from his meager estate (his house). 
