In April 2005, Congress made sweeping changes in U.S.
bankruptcy law that will go into effect on October 17, 2005.
It's called the "Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005," and it means big trouble for Americans
struggling with debt problems.
What effect will the new bankruptcy law have on the practice of
Debt Settlement (also called Debt Negotiation)? Will creditors
still be willing to negotiate with consumers seeking to avoid
bankruptcy? Will lump-sum settlements for 30%, 40%, 50% still
be possible now that this tough new law has been passed?
The short answer is "YES." It will be "business as usual" in
the collection industry. People that choose to file bankruptcy
will definitely be affected for the worse, as I'll outline
below, but those who choose to privately negotiate their way
out of debt will notice very little difference. Creditors will
still negotiate. Deals will still be made. And nothing much
will change in the world of collections. In fact, a viable
alternative to bankruptcy will be needed more than ever.
The credit card banks lobbied with millions of dollars to get
this law passed. They've been working at it for about a decade.
Now they are celebrating. These are the folks who think the
bankruptcy system has been abused by wealthy individuals, who
have defrauded creditors when they could have repaid their
debts.
The facts tell a different story:
1. During the period from 1995 to 2004, bankruptcy filings
doubled, while in that same period, credit card industry
profits TRIPLED.
2. Credit card companies have not been held accountable for
their targeting of "easy credit" to individuals who could not
afford such loans, which in turn has contributed to the wave of
bankruptcies over the past decade.
3. For people 60 or older, 85% of bankruptcies are caused by
medical bills or job loss.
4. A divorced woman is 300% more likely to file bankruptcy than
a married woman.
5. African-American and Hispanic homeowners are 500% more
likely to file bankruptcy than white, non-Hispanic homeowners.
6. Approximately half of all bankruptcies are filed because of
medical expenses due to lack of health insurance, or lack of
adequate coverage leading to uncovered expenses.
7. The median income of bankruptcy filers is $25,000. (So much
for the "rich" abusing the system.)
The new law was a GIFT to the credit card banks, pure and
simple. Some estimates show that it will add another $5 billion
to the industry's bottom line. In other words, the bill is about
profits and not much else.
Since my whole approach is about avoiding bankruptcy, I won't
go into a detailed analysis of the provisions of the new law.
But just to summarize, the net effect is that many (if not
most) people seeking relief under Chapter 7 bankruptcy will be
forced to file under the Chapter 13 version instead. In plain
English, that means that most filers will be forced to pay back
a portion of the debt over a 5-year schedule set by the court.
One of the worst aspects of the new bill is the use of IRS
"allowable" expense schedules for determining your monthly
budget. In other words, your actual living expense are thrown
out the window in favor of the IRS standards (and we all know
how generous the IRS can be!). So if your actual rent is $1,300
per month, and the IRS says it should be $1,045 for your county
and state, that's TOUGH! The court will only allow the $1,045,
period.
In short, people attempting to file bankruptcy after October
17, 2005 are in for an extremely rude awakening! Goodbye cell
phones, cable TV, high-speed Internet access, movies, meals
with the family, and anything else beyond the minimum allowable
expenses as determined by the IRS and the courts.
So what makes me so certain that the banks will be as eager as
ever to settle with consumers for 50 cents on the dollar or
less? Simple. Two words: Stealth Bankruptcy.
Hundreds of thousands of Americans are going to discover the
new reality of this tough law, and they are going to forgo the
court system of filing bankruptcy in lieu of what I call
"stealth bankruptcy." A stealth bankruptcy is when you move
(with no forwarding address), change your phone number, and
drop off the radar screen to live on an all-cash, no-credit
basis. Many people already choose this path rather than deal
with the invasion of privacy that comes with formal bankruptcy.
After the new law goes into effect, more people than ever will
take this approach.
Besides the problem of stealth bankruptcy, there are other good
reasons the banks will settle as they always have. Consider
these points:
A. The creditor doesn't know whether or not you'll still
qualify for Chapter 7 or Chapter 13 bankruptcy. They still face
the risk that you will qualify for Chapter 7 and end up
discharging your debt in full, which means they get NOTHING.
B. Even if you file Chapter 13 under the new guidelines, the
creditor will still only receive 30-50% of the debt on average
(much less in some cases).
C. Under Chapter 13, it will still take the creditors 3-5 YEARS
to recover that 30-50%.
D. A lump-sum of 30-50% TODAY is far better than the same
amount collected over 3-5 years.
Of course, I certainly expect debt collectors to use the new
law to harass and intimidate people who don't know and
understand their rights. You can expect them to say things
like, "You can't file bankruptcy under the new law, so you'd
better pay up today!" They will bully and threaten as always,
but at the end of the day, they will still accept reasonable
settlements. After October 17, 2005, it will still be "business
as usual" in the world of debt collections.
About The Author: Charles J. Phelan has been helping consumers
become debt-free without bankruptcy since 1997. A former
executive in the debt settlement industry, he teaches the
do-it-yourself method of debt negotiation. Audio-CD material
plus expert personal coaching helps consumers achieve
professional results at a fraction of the cost.
http://www.zipdebt.com
