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/article4

---

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.C. § 1692g(a)This will be a pretty long lesson and will cover an integral part of... Read More

UK Debt When Moving Abroad

The idea of moving abroad to escape debt seems to be more of a common practice these days. People with failed businesses or swamped in debt seem... Read More

What Is A FICO Score?

Your FICO score or credit score as it's commonly called is a very important calculation that can control whether or not you are eligible to receive credit... Read More

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... Read More

Bankruptcy Interest Increases as Deadline Approaches

Congress recently passed sweeping legislation that will significantly reform American bankruptcy law. Designed to eliminate the "convenience bankruptcy" of compulsive gamblers and the financially irresponsible, this legislation... Read More

The Road to Debt Relief

Living with debt is not something someone hopes for, but it happens and it usually becomes far more severe than it should before something is done to... Read More

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... Read More

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... Read More

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... Read More

Debt is The Master of Souls

Wholeness requires separation. In order for you to experience yourself as being whole, you spend most of your live experiencing being separated, trying to get back to... Read More

Credit Counseling or Bankruptcy: Which is Best for You?

People often get to a place where they simply can't pay their bills, especially in today's economy which is not particularly sympathetic toward the poor or even... Read More

Credit Repair? Its All Up to You

Log onto to a search engine such as google.com and type in the term credit repair. It's likely that Google will return more than 25 pages of... Read More

Life After Debt ? Strategies for Dealing with Problem Debt

Honorably and ethically rid yourself of burdensome debts using the little known Negotiation Strategy, without having to experience the loss of control and privacy associated with filing... Read More

Debt Problems? You Can Negotiate With Your Creditors

It is always possible to negotiate with creditors ? even if they have already taken you to court to get a judgment or to garnish your wages.Getting... Read More

Christian Debt Consolidation ? Feel Comfortable About Managing Your Debt

Many Christians feel uncomfortable with the notion of being in debt, and even more so when the debt has gotten out of control. Some say that it... Read More

Secrets to Why Debt Reduction is So Vital for Your Financial Health

Living with debt is never a good idea if you want to make long-term financial plans. Every cent you use to service debt is money that could... Read More

Think for a Change

I'm not sure where it originated, but I've heard it repeated time and time again: Insanity is doing the same thing over and over and expecting different... Read More

Debt Elimination 3

Planning To Achieve Debt EliminationOnce you have started the process of changing your debt mindset to be against taking on consumer debt, then that is something you... Read More

Debt Management - Is It the Right Choice For You?

Debt Management plans offer credit counseling clients a different and new approach to tackle their finances. Finding out if a debt management plan is right for you... Read More

5 Ways to Get Out of Debt

It has been said that everyday more and more people in the world are getting into unsecured debt. Once reason for this is the relative ease in... Read More

Dont Let The Good Times Bury You

It is vital to get rid of debt while things are going well. Yet the opposite is usually the case. Human nature is such that when we... Read More

Save Money When Going Out

It seems as though whenever we go out for the night, it costs much more than we originally intended to spend. Having a 'night on the town'... Read More

Why You Should Get Out of Debt Today?

The main reason for getting out of debt today, is because people with little or not debt have more control over their future:1. They have more discretionary... Read More

Bankruptcy: Which Chapter Do I File?

There is more than one kind of bankruptcy. You should understand your options before deciding which chapter of bankruptcy you are going to file for, or if... Read More

Student Loans Can?t Be Swept Away Through Bankruptcy

Bankruptcy is in the news these days, as Congress has finally overhauled the Federal bankruptcy law after years of talking about it. The credit card companies, rightly... Read More

Debt Consolidation Versus Debt Negotiation

Debt consolidation versus debt negotiation are two options that are available to you if you need debt assistance. When your monthly bills become too much for you... Read More