Bankruptcy law isn’t working so far

Last year, amid much shouting from the banking industry, members of Congress and the President of the United States, the Bankruptcy Abuse and Consumer Protection Act was passed into law. This bill, the most sweeping reform of American debt law in twenty five years, was supposed to dramatically curtail the filing of personal bankruptcy cases in courts. The law was written at the urging of the credit card industry, which offered the opinion that people were filing for bankruptcy in order to avoid paying their bills.

That argument doesn’t really hold much water, as the industry already charges interest rates that are high enough to offset their losses. There is no other explanation for credit card interest rates in the 20-30% range when money is available elsewhere for less than 10%. The industry is doing just fine, as their quarterly reports and smiling stockholders will attest.

The Act established some rules intended to make it more difficult for people to file for bankruptcy. One such rule requires anyone considering filing for debt relief to first undergo credit counseling. The idea put forth with this requirement is that people would learn about money management so that they could avoid financial trouble in the future. In truth, the intention was for people to see these counseling agencies in order that they might be swayed into signing up for debt management plans. These plans would allow the counseling firm to negotiate a repayment schedule for the client, who could then repay the debt without having to file for bankruptcy.

This is not so good for the consumer, who has to pay the agency as well as the creditor. Worse, the agencies often encourage the clients to stop paying the bills or talking to their creditors directly. This results in late payment fees and a reduced credit score. On the other hand, the counseling agencies receive monthly fees from the client and kickbacks from the creditors, and the creditors eventually get paid, which wouldn’t happen with a bankruptcy filing.

Well, it isn’t working.  In the first three months since the new law took effect, less than 5% of all would-be filers opted to enroll in a debt management plan. The rest all opted for bankruptcy. Most of them, it should be noted, are so far in debt that repayment is impossible. When a young couple with two children has nearly $60,000 in credit card debt, even a minimum monthly payment of $4000 is out of reach. At that point, only bankruptcy is possible.

Time will tell the full tale of how well the new law really works, but so far, it is not working as intended. People are still filing for debt relief and that will probably not change anytime soon. If the credit card industry wants to see fewer people file for debt relief, they might consider being a little less generous when they hand the cards out in the first place.

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