The New Bankruptcy Law -- How Will It Affect Debt Negotiation?

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.

Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt settlement firms, he is the author of the Debt Elimination Success Seminar?, a five-hour audio-CD course that teaches consumers how to choose between debt program options based on their financial situation. The course focuses on comprehensive instruction in do-it-yourself debt negotiation & settlement designed to save $1,000s. Personal coaching and follow-up support is included. Achieves the same results as professional firms for a tiny fraction of the cost. http://www.zipdebt.com

More Resources

Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting

More Debt Relief Information:

Related Articles


You Can Make Financial Resolutions Anytime
The New Year often brings with it a desire to right the wrongs in yourlife. From this desire springs the tradition of New Year resolutions.
5 Methods Toward Reducing Your Debt
Decreasing your debt is paramount to having a good credit rating as well as giving you peace of mind. You want to get out of debt, but not all debt reduction options may be beneficial.
The 5 Secrets to Getting Out of Debt Fast
As they stare down at a teetering pile of bills, so many consumers wonder how they racked up such a large debt. The answer boils down to simple mathematics.
Debt Elimination 2
The First Step To Debt EliminationRegardless of your personal and financial circumstances, your education and your background, the chances are the first step you need to take in debt elimination has to take place in your mind. The Western mindset, especially in the US and UK, is firmly fixed on consumer debt.
The Effects of Consumer Debt
Consumer BorrowingConsumer borrowing in the UK has now crashed through the £1 trillion barrier. 80% of this is due to credit card borrowing, loans and mortgages.
Use A Debt Checklist To Examine Where You Are
A Debt Checklist allows you to look at items and areas of your financial life. You need toexamine these to gauge how you stand.
Bankruptcy - The Easy Option?
Incredibly, since the changes in the bankruptcy law in April 2004, debtors are more likely to petition for their own bankruptcy rather than their creditors! You would think that most people who have been threatened with the prospect of being made Bankrupt would be riddled with fear of the possibility. It is more widely referred to as the "Big B" rather than the dreaded word itself.
Utah, the Nation's Bankruptcy Capital
Congress recently passed the Bankruptcy Abuse Prevention and Consumer Protection Act, designed to minimize frivolous bankruptcy filings and to require debtors to repay some of their debt. Once it takes effect in October, 2005, the law will make it harder for those with problem debt to have their debt wiped away by the courts.
Credit Repair - Understanding The Basics
What is Credit?Credit means that you are using someone else's money topay for things. It also means that you are making a promiseto repay the money to the person or company that loaned youthe money.
Top Ten Reasons People File for Bankruptcy
1. Eliminate the legal obligation to pay many of your debts.
Life on a Debt Management Program
Signing up for a debt management program is easy; it's a matter of finding a company you feel comfortable with that is difficult. There should be no pressure added from the company you speak with, joining a DMP is your decision and you should feel like you are in a partnership with the company, meaning you both have control over your financial situation.
Debt Collectors; And what you can do to Get Them Out of your Life
FTC opinion letter on validation Section 809(a) of the FDCPA, 15 U.S.
Learn The 15 Debt Elimination Steps You Must Take Immediately!
What Everybody Needs To Know..
IVA Information
If you're thinking about an IVA, it is essential to get the best information possible. This is because although an IVA can be a manageable way to resolve your debt problems, it can also represent a commitment of up to five years.
How to Choose a Debt Settlement Company
As consumer debt continues to spiral out of control, debt relief is fast becoming a major concern for many American's. In 1999, American's made $1.
Debt Handling Solutions
Sometimes debt can seem overwhelming. In those instances, or even before things get that far out of hand, get back to basics and try some of these debt handling solutions.
Benefits and Drawbacks of Bankruptcy
Outlined below are some of the benefits and drawbacks of bankruptcy. It should be noted that bankruptcy is not to be entered into without first having sought professional advice.
Getting Past The Idea Of Budgeting & Saving Money
I'm sure you'll agree that budgeting, saving money, and eliminating debt are very appealing ideas. If effectively tackled, these goals can secure your financial status for the future, and allow you to live a comfortable, debt-free life.
Personal Debt Reduction Practices
Personal debt reduction practices, the steps people take to relieve the debt in their lives and to become more financially free, are a hot topic among financial circles. American spending habits are producing more people who are deeper in debt rather than people trying to achieve financial freedom.
What You Should Know About Bankruptcy
Filing bankruptcy is not only a last resort legal action; it is also a very complicated legal action that definitely needs the expertise of a lawyer. When thinking about bankruptcy, you first need to decide if bankruptcy is right for you.