ALSO -- Best
Credit Card Rates
New Law Makes
Filing
Bankruptcy A Lot Tougher
by Robert K. Heady, Bank Rate Monitor
You
need this news like you need a hole in the head:
After four years of
Congressional wrangling, the new federal Bankruptcy Reform Act
is about to become law, thanks to pressure from banks and credit
card companies.
Creditors want to stop
what they call "abuses" of the bankruptcy system by
people who could afford to pay their debts but instead walk away
from them.
The law is going to
shove consumers away from a Chapter 7 bankruptcy, which wipes
out all debts, to a Chapter 13, which, if the person is able
to repay at least 25 percent of their debt over five years, he
or she would have to work it out with creditors. The bankruptcy
court will decide which Chapter the debtor is eligible for 7
or 13. Until now, the 7's have outnumbered the 13's by more than
2-to-1, but that will probably be reversed. Credit card issuers
are squealing with glee because they expect to receive tons of
payments they otherwise wouldn't get.
If you think last year's
1.4 million bankruptcy cases were a lot, you ain't seen nothing
yet. The number may grow by another 1 million cases, with "home
foreclosures the likes of which we haven't seen since the Great
Depression," said one attorney. "It's going to take
the steam valve off our economic engine," predicted another.
The folks who are groaning
aren't just money-poor consumers. They also include:
1) Credit counseling
agencies, because under the law debtors must see an agency before
filing for bankruptcy, and that's going to overload the counseling
system. One agency said it may start charging consumers $35 a
visit instead of providing free services. Plus, creditors that
have been cutting back on their behind-the-scenes funding of
the agencies may chop it some more.
2) Bankruptcy lawyers,
believe it or not. With the new law, if the attorney tries to
get a Chapter 7 for his client and fails, he must pay a fat fee
to the trustee for the creditors. Presumably, that kicks the
client into Chapter 13. "The lawyer may have to shell out
$1,000, double what he's charging the client," said one
attorney. "He'll ask himself, `Do I want to keep practicing
bankruptcy law, or go on to something else?' The workload on
judges is also going to be enormous."
Briefly, here's what
Joe Doaks will have to do to file bankruptcy:
1) Find a bankruptcy
attorney or other person even a paralegal who must, by law, describe
himself as a "Debt Relief Agency" in his advertising.
(Imagine if this spawns a whole host of new scam operations in
America!)
2) Initiate credit
counseling with a review of all debts, and obtain a certificate
to prove it.
3) With the attorney,
prepare a program showing how any debt can possibly be discharged
(such as with the assistance of the credit counseling agency).
4) The attorney files
Joe Doak's petition with the bankruptcy court.
6) If Joe qualifies for Chapter 7, he need not appear in court. If he doesn't qualify and winds up in Chapter 13, he must go to court and be questioned by both the trustee and the judge. If Doaks has no attorney, the judge will counsel him. Meanwhile, creditors pray the judge won't discharge any of the debt.
"Too many people think bankruptcy can't happen to them," says David J. Light, senior managing editor of Consumer Bankruptcy News, based in Palm Beach Gardens, FL. "It happens to good, honest, hardworking people. If it happens to you, let's hope you have the same chance to save yourself as you've had under the old system."
How did all this happen, anyway? Take a good look at the Web site for Common Cause, at www.commoncause.org, and investigate which U.S. Senators and Congressmen took the most money for their last election campaign from credit card issuers, banks and finance companies. Then find out whether they voted for or against the new bankruptcy law.
It's not a good day for the little guy."
Editor's Note: Robert Heady is founding publisher of Bank Rate Monitor and is the co-author of the book, "The Complete Idiot's Guide to Managing Your Money." You can e-mail him at jrnl888@aol.com. His columns appear regularly in the print version of the Bull & Bear Financial Report.
