Sunday, June 18, 2006

The new bankruptcy law and the middle class

The new Federal bankruptcy law enacted last fall was predicted to have a major impact on people with credit card debt. The biggest losers were projected to be uninsured or under-insured middle class Americans who racked up major charges for medical bills, and many of whom would now be unable to seek the protection of Chapter 7 bankruptcy and the "clean slate" it provides.

Instead this group would be forced into Chapter 13, where they would face years of large payments. The jury is still out on how this change will ultimately affect people's ability to bargain with creditors. Anecdotal evidence seems to suggest people are still able to negotiate repayments involving repayment of as little as 25-50% of the PRINCIPAL on their accounts.

The one thing that seems certain is that you should investigate settlement options well before they get to the point of bankruptcy. Earlier (pre-bankruptcy) debt settlement still benefits the consumer and the creditor. The consumer gets a reduced repayment amount and is able to proceed with rebuilding his or her credit much sooner, and the creditor gets to recoup part of the debt owed while saving on court and legal costs. It's a win-win situation


Blogger tsglisa said...

There is no doubt that the bankruptcy law is an issue. There are people who get into debt by spending their way there on TVs, cars, and interest free loans...and then there are the folks who have big legal or medical costs that they simply have no control over. There needs to be a way to help them.

Help Getting Out of debt.

2:40 PM  
Blogger smiller said...

The simple fact of the matter is that the credit card industry was one of the biggest sponsors of this law, and the industry also encourages people to spend irresponsibly and beyond their means.

The net result is that they create an ever enlarging pool of people with excessive credit card debt. Of course, this all works to the industry's advantage. They don't make money on people that pay their bills on time. In fact, they lose money on people who pay off their balance every month.

So we have a situation where a huge industry relies largely on irresponsible consumer spending, which it also encourages by mailing out incessant "no interest" offers and "cash advance" checks.

Enter the new bankruptcy law, which at least creates the perception that bankruptcy is less of a viable option for consumers. The credit card industry sponsored this law because it believed it would force or coerce more of these irresponsible spenders (and those forced into debt by circumstance) to pay back more money. That makes sense for the industry, but is it responsible public policy?

The sole reason credit card companies get away with charging exorbitant interest is because the debt is unsecured. This law seems to be an attempt to secure some of this debt through a manipulation of bankruptcy law.

Again, this makes sense for the credit card industry. I just don't feel that it makes sense as public policy. To me this is more evidence of the power of lobbying interest to manipulate the legislative process in a manner that perhaps contradicts the will of the electorate.

One positive note for debtors is that the net effect of the new law has NOT been to increase the amount owed to credit card companies after bankruptcy. People need to know this, since I have heard that some collection agents are asserting that the opposite is true.

3:01 PM  
Blogger Benjaminjames said...

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9:23 AM  

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