One of the worst things that can ever happen to a person financially is to be forced into bankruptcy. Many times, bankruptcy proceedings are an unnecessary step that is taken by the financially desperate. The repercussions of declaring bankruptcy are far too severe for anyone to consider filing, unless the situation is beyond repair under any other method.
The New Bankruptcy Law — How Will It Affect Debt Negotiation?
In April 2005, Congress made sweeping changes in U.S. bankruptcy law that went 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 is still “business as usual” in the collection industry. People forced to choose bankruptcy are being affected for the worse, as I’ll outline below, but those able 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 and – for 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 are now 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 expenses 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 are in for an extremely rude awakening. Goodbye cell phones, cable TV, high-speed Internet access, movies, meals out 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 discovering the new reality of this tough law, and 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 leaving 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.
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 you’ll 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 and much less in some cases.
C. Under Chapter 13, it will still take the creditors 3 to 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 to 5 years.
Of course, debt collectors are already using 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. Now that October 17th has come and gone, it remains “business as usual” in the world of debt collections.
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