In April 2005, Congress made sweeping changes in U.S. bankruptcy law that will go into effect on October 17, 2005. Its 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 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 Ill 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, there will be more need than ever for a viable alternative to bankruptcy.
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 that 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 industrys bottom line. In other words, the bill is about profits and not much else.
Since my whole approach is about AVOIDING bankruptcy, I wont 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 3-5 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, thats 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, HUGE numbers of people will go this route.
The banks will settle as they always have. They will be more starved than ever to take a good deal when you offer it to them. Consider these points:
A. The creditor doesnt know whether or not youll still qualify under Chapter 7 or Chapter 13. 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 dont know and understand their rights. You can expect them to say things like, You cant file bankruptcy under the new law, so youd better pay up today! They will bully and threaten as always, but at the end of the day, they will still accept reasonable settlements. As I said, it will be business as usual in the world of collections.