In April 2005, Congress made sweeping changes in U.S. bankruptcy law that went 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. 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, it's all about profits and not
about "consumer protection."
There is a lot of confusion and misinformation about the new law. Understandably, many people
have serious questions about the effect of the new rules on Debt Negotiation & Settlement:
- "Will creditors still settle now that the new law is in effect?"
- "Isn't all the negotiation leverage gone after October 17, 2005?"
- "Since everyone has to do Chapter 13 now, won't creditors refuse to settle?"
The confusion is understandable, but totally unnecessary, because
creditors are still
settling just the same as before. It's "business as usual" in the world of
debt collections. Lump-sum settlements of 50%, 35%, even as low as 20%, are still happening
every day all across the country, and
the new bankruptcy law has NO effect on debt
settlement.
Here's why:
1.
The negotiation leverage is still there, because the creditor has
no way to know in advance whether your case would be a Chapter 7 or a 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.
2. Even if you file a Chapter 13 bankruptcy under the new rules,
the creditor will
still only receive 25% to 50% of the debts on average.
3. Under Chapter 13, it will take the creditor
FIVE YEARS to recover that 25% to 50%.
4. A lump-sum of 25% to 50% TODAY is far better than the same amount collected over FIVE YEARS.
To help put this in perspective, pretend for a moment that YOU are the creditor. Let's say someone
owes you $10,000. They make you an offer to settle for a lump-sum of $4,000 within the next 30 days.
What are your options? You can refuse the settlement and take a chance on the debtor filing bankruptcy,
in which case you may get ZERO if they qualify for Chapter 7. If they end up in a Chapter 13 bankruptcy,
the probable outcome is that you will recover anywhere from $2,500 to $5,000, but it will take FIVE
YEARS to collect it! So what would YOU do? Reject the settlement offer and take a chance on getting
nothing? Or take the $4,000 and call it a day? It's pretty much a no-brainer, right?
In short,
creditors will still settle for 50% or less of what's owed simply because it's
a SMART BUSINESS DECISION!
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. As I said, it's "business as usual" in the
world of debt collections.
Charles J. Phelan has been helping people 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.
