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The New Bankruptcy Law -- How Will It Affect Debt
Back To Main Page Negotiation?
by: Charles Phelan
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 30À40À50​till 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,
Click Here for more articles 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​f bankruptcies are caused by medical bills or job loss.

4. A divorced woman is 300​ore likely to file bankruptcy than a married woman.

5. African-American and Hispanic homeowners are 500​ore 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

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

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​f 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 30-50í

D. A lump-sum of 30-50 ODAY 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.

About the author:
Charles J. Phelan has been helping consumers become debt-free without bankruptcy since
1997. A former executive in the debt settlement industry, he teaches the do-it-yourself method
of debt negotiation. Audio-CD material plus expert personal coaching helps consumers
achieve professional results at a fraction of the cost.

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