The New Bankruptcy Law -- How Will It Affect Debt Negotiation?
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.
Charles J. Phelan has been helping consumers become debt-free without
bankruptcy since 1997. A former senior executive with one of the nation's
largest debt settlement firms, he is the author of the Debt Elimination
Success Seminar?, a five-hour audio-CD course that teaches consumers how
to choose between debt program options based on their financial situation.
The course focuses on comprehensive instruction in do-it-yourself debt
negotiation & settlement designed to save $1,000s. Personal coaching and
follow-up support is included. Achieves the same results as professional
firms for a tiny fraction of the cost. http://www.zipdebt.com/article4
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