The New
Bankruptcy Law -- How Will It Affect Debt Negotiation?
by: Charles Phelan
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.
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