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The New Bankruptcy Law -- How Will It Affect Debt Negotiation?
By Charles Phelan, Fri Dec 9th
In April 2005, Congress made sweeping changes in U.S. bankruptcylaw that will go into effect on October 17, 2005. It's calledthe "Bankruptcy Abuse Prevention and Consumer Protection Act of2005," and it means big trouble for Americans struggling withdebt problems. What effect will the new law have on the practice ofDebt Settlement (also called Debt Negotiation)? Will creditorsstill be willing to negotiate with consumers seeking to avoidbankruptcy? Will lump-sum settlements for 30%, 40%, 50% still bepossible now that this tough new law has been passed? The short answer is "YES." It will be "business as usual" in thecollection industry. People that choose to file willdefinitely be affected for the worse, as I'll outline below, butthose who choose to privately negotiate their way out of debtwill notice very little difference. Creditors will stillnegotiate. Deals will still be made. And nothing much willchange in the world of collections. In fact, a viablealternative to will be needed more than ever.
The credit card banks lobbied with millions of dollars to getthis law passed. They've been working at it for about a decade.Now they are celebrating. These are the folks who think thebankruptcy system has been abused by wealthy individuals, whohave defrauded creditors when they could have repaid their debts. The facts tell a different story: 1. During the period from 1995 to 2004, filingsdoubled, while in that same period, credit card industry profitsTRIPLED. 2. Credit card companies have not been held accountable fortheir targeting of "easy credit" to individuals who could notafford such loans, which in turn has contributed to the wave ofbankruptcies over the past decade. 3. For people 60 or older, 85% of bankruptcies are caused bymedical bills or job loss. 4. A divorced woman is 300% more likely to file thana married woman. 5. African-American and Hispanic homeowners are 500% more likelyto file than white, non-Hispanic homeowners. 6. Approximately half of all bankruptcies are filed because ofmedical expenses due to lack of health insurance, or lack ofadequate coverage leading to uncovered expenses. 7. The median income of filers is $25,000. (So muchfor the "rich" abusing the system.) The new law was a GIFT to the credit card banks, pure andsimple. Some estimates show that it will add another $5 billionto the industry's bottom line. In other words, the bill is aboutprofits and not much else. Since my whole approach is about avoiding bankruptcy, I won't gointo a detailed analysis of the provisions of the new law. Butjust to summarize, the net effect is that many (if not most)people seeking relief under Chapter 7 will be forcedto file under the Chapter 13 version instead. In plain English,that means that most filers will be forced to pay back a portionof 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 monthlybudget. In other words, your actual living expense are thrownout the window in favor of the IRS standards (and we all knowhow generous the IRS can be!). So if your actual rent is $1,300per month, and the IRS says it should be $1,045 for your countyand state, that's TOUGH! The court will only allow the $1,045,period. In short, people attempting to file after October 17,2005 are in for an extremely rude awakening! Goodbye cellphones, cable TV, high-speed Internet access, movies, meals withthe family, and anything else beyond the minimum allowableexpenses as determined by the IRS and the courts. So what makes me so certain that the banks will be as eager asever to settle with consumers for 50 cents on the dollar orless? Simple. Two words: Stealth Bankruptcy. Hundreds of thousands of Americans are going to discover the newreality of this tough law, and they are going to forgo the courtsystem of filing in lieu of what I call "stealthbankruptcy." A stealth is when you move (with noforwarding address), change your phone number, and drop off theradar screen to live on an all-cash, no-credit basis. Manypeople already choose this path rather than deal with theinvasion of privacy that comes with formal bankruptcy. After thenew law goes into effect, more people than ever will take thisapproach. Besides the problem of stealth bankruptcy, there are other goodreasons the banks will settle as they always have. Considerthese points: A. The creditor doesn't know whether or not you'll still qualifyfor Chapter 7 or Chapter 13 bankruptcy. They still face the riskthat you will qualify for Chapter 7 and end up discharging yourdebt in full, which means they get NOTHING. B. Even if you file Chapter 13 under the new guidelines, thecreditor 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 YEARSto recover that 30-50%. D. A lump-sum of 30-50% TODAY is far better than the same amountcollected over 3-5 years. Of course, I certainly expect debt collectors to use the new lawto harass and intimidate people who don’t know and understandtheir rights. You can expect them to say things like, "You can’tfile under the new law, so you’d better pay uptoday!" They will bully and threaten as always, but at the endof the day, they will still accept reasonable settlements. AfterOctober 17, 2005, it will still be "business as usual" in theworld of debt collections. About the author:Charles J. Phelan has been helping consumers become debt-freewithout since 1997. A former executive in the debtsettlement industry, he teaches the do-it-yourself method ofdebt negotiation. Audio-CD material plus expert personalcoaching helps consumers achieve professional results at afraction of the cost. http://www.zipdebt.com
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