I’ve heard of the new bankrupcy law that is supposed to make it harder to declare bankrupcy. What does this law actually do? Why in a time when more and more people are accumulating debt beyond their means would this law be passed? Finally, if you are completely unable to pay a debt, and can not declare bankrupcy, what can be done? Can they still throw you in debtor’s jail? Ship you off to here or Austraila?
The new law is going to make it hard to dismiss unsecured debt in bankruptcies, many who now qualify for a chapter 7 fresh start will have to file for a chapter 13 repayment plan. You cannot go to jail for not paying a debt and you won’t be shipped of to some remote land. The biggest problem with the new law is the conception that most debt discharged in bankruptcies in consumer debt due to over extending one’s self with credit cards. There are lots of folks (and politicians) that think there are thousands of folks that go out and spend money willy nilly then when the bills start coming in they go file for bankruptcy. This is actually a very small percentage of those that currently file. The most common reason for filing is large medical bills due to accidents and long term illness. Next is loss of job then death of a family member.
The new law takes effect on October 17. A friend that works in the banking industry says she expects to see a huge increase in the number of home forclosures and consumer debt lawsuits. Some collection agencies have been very aggressive in buying stale consumer debt in anticipation of the new laws. I don’t know if it will be as bad as she predicted, we will just have to wait and see.
So does the new law offer any advantages to consumers?
One advantage might be a potential decrease in the average contribution each consumer makes toward the cost of bankruptcies.
Not much. If you have no assets (high salary, more than one house, bank accounts, investments, etc.), it will be pointless to file a civil suit against you. Most states have strict guidelines about how much money can be garnished from your wages, as much as $400/week can be exempt from garnishment. In addition, if you only have one vehicle, many states exempt your vehicle from seizure, as well as protecting your house if it is the only one you own and live in it.
No and No.
I’m not able to find a good summary now, but this is my memory of a summary from the financial section of the newspaper a few months ago.
If a person gets towering medical bills, say, up till now, he would have filed Chapter 7 bankruptcy, and his assets would have been paid out to his creditor(s) at X cents on the dollar. He gets pretty much wiped out, and his creditors have to take it (and get a tax break for the bad debt).
He would have been able to retain certain assets (tools of his trade, some others–it seems this varies by state). But from then on, he would be able to use new money from gainful employment to rebuild his life, put a kid through college, whatever.
But now he will have to file Chapt.13 bankruptcy, paying out a percentage of his future earnings for years to come. Assuming his medical bills amount to five years of his income, and he has to pay 25% of his income per year to the creditor, that’s 20 years before he has satisfied his medical bills. Dunno if interest would be added.
(These numbers are guesstimates for purpose of illustration.)
Oh, and
The creditor companies are the ones that pushed Congress for this law. They benefit from issuing more debt as they profit from the interest. Simply a matter of more business=more profit.
The discussion in the financial section stated that credit appeared to be issued more freely in anticipation of greater ease of collection.
The law requires many debtors to take a credit counseling class. This may or may not benefit the most common bankrupts, as per racer72’s information,
I had a cousin in Seattle (area) that due to interest turned various tickets into $15k and had to declare bankruptcy. Depending on which side of the coin you’re on, this can be good or bad.
That said;
Medical bills need to be covered in some way.
I won’t go into the reasons why, as that would put is in Debates, but it should be.
Hmmm… so it would be a lot quicker and easier just to not pay the bills at all and wait the seven years for the negatives to drop off of your credit report.
This part of your post is not correct. Chapter 13 repayment plans are from 3-5 years in length, after which any remaining debt is discharged. There are subsets of debt that must be paid in full, like child support, fines and student loans.
This is a critically important point that is often not included in bankruptcy discussions.
Absolutely. Since credit card companies will have a higher probability of collection despite bankruptcy, they can reduce their net loss provisions. This is perhaps the most costly item on their balance sheets. This reduction will be passed back to consumers in the form of lower interest rates.
For all you folks who think this is just another way the plastic industry is sticking it to the man, how do you feel about subdizing the bankruptcies of other people? Under the current scheme, you are.
This will never happen. There are plenty of low interest rate cards around now, if you have good credit. Their biggest business right now is extending credit to people who have lousy credit, and have to pay high interest rates to feed their habit. This law just makes it easier for them to increase profits through more successful collections. They will never lower interest rates, so long as there are suckers who continue to pay them.
You are misinformed. Almost all major credit card issuers have reduced their subprime credit exposure by up to 33% in the past year alone. This shift in real estate has been consistent for the past five years or so. The growth market for issuers is in prime and above-prime credit portfolios. High-spending, affluent consumers are targeted with much greater vigor and for them, credit offerings are robust.
This is also misinformed. Issuers are competing fiercely for wallet share in mature markets like the United States. Affluent, financial-savvy consumers can frequently and easily transfer balances to cards with a lower APR. They aren’t so easily induced by artificially low introductory APR, but they look at what happens to rate in six months or a year. Once net loss provisions are reduced due to the change in bk laws, issuers will be able to compete on rate more effectively, and you will see interest rates drop as issuers struggle to maintain wallet share and to increase billings.
Billions and billions of dollars are effectively wasted by sitting on the net loss provision line, reserved against defaulted debt. I simply cannot understand why there is so much resistance to freeing this money up and letting it perform some useful function. Like, for example, lowering your plastic APR.
I know Chapter 13 is going to be mandatory above the “state median income” if you file, but Chapter 7 is an option below the “state median income”.
Do they have a chart displaying “state median income” for purposes of this law yet?
Does it go by household size, or is it the same number per adult in the household?
Chapter 7 will still be possible above the median income, but the debtor will have to meet a means test. Here is a “beta” means test calculator (xls spreadsheet) for the Middle District of Florida.
Census Bureau Median Income for 4-Person Families, by State
It will go by household size.
Here is a list of changes enacted in the new law.
How do they prove income? Just because I made $156,000 as a systems engineer last year doesn’t mean I’m employed this year.* And perjury aside, how can they prove I’m employed? It seems like the “standard” always used is the prior year income tax return.
*No, I’m not a systems engineer, and that’s not what I made last year, but I could be unemployed next year.
Never mind the above – I read a link that explained it all.
What’s the “median” for a family of 1, in Northern CA, near San Jose?
Thank you, Cheesesteak, I was not aware of that.
Wow, so one of the links above took me to a qualification/abuse worksheet. I thought I was doing really dang good for myself, but it looks like I could file for bankruptcy right now without falling in the “abuser” category!
I’d been worried about this law but at the same time angry at real abusers – but now I’m wondering if this will really make a difference?