New bankruptcy law not working as intended; most can still qualify

After years of lobbying by the credit card industry, Congress passed sweeping bankruptcy reform in 2005. The Bankruptcy Abuse and Consumer Protection Act had the biggest changes in debt relief law in 25 years, and was intended to keep consumers from spending like crazy and filing for debt relief when the bills came due. The credit card industry, not satisfied with earning 20% on their money, thought that people were filing for bankruptcy out of convenience, not necessity. So the bill was passed with the intention of making it difficult for consumers to have their debts wiped away by the courts.

The law had numerous changes; consumers would have to demonstrate that their income was insufficient to cover their debts. Those consumers that could afford to pay would have to pay. Lawyers would be held responsible for the accuracy of the documents they filed on behalf of their clients. Consumers were required to undergo credit counseling before they could file in the hopes that the counseling agencies would encourage them to pay their debts. The list of restrictions went on and on. And as the deadline for the new law approached, bankruptcy courts were flooded with cases from people who wanted to file before the new law took place. Since then, the courts have been quiet, as consumers have shied away from filing.

It turns out not to have mattered. Studies show that virtually everyone who would have qualified for bankruptcy relief under the old law will still qualify under the new law. In fact, 97% of those who would qualify before will qualify now. Credit counseling hasn’t helped; the counselors have discovered that nearly all of their clients simply cannot afford to repay their debts. As a result, most people fling for bankruptcy are still having their debts discharged through Chapter 7 of the bankruptcy code, just like before.

Consumer advocates are worried that a number of people with problem debt who should be filing for debt relief are not because they are concerned that the new law will force them to repay debts that they cannot repay. These people may be hiding or running from their creditors when they should be seeking relief through the courts. Time will tell what will happen under the new law, but the initial findings seem to be that the law has been ineffective for everyone except those in the credit counseling industry. They have made out pretty well as the law is now forcing customers upon them.

For consumers with problem debt, it boils down to this - If you have a problem, talk to someone about it. If your debt is so serious that you cannot repay it, you will almost certainly be able to seek relief through the courts. Talk to a bankruptcy attorney or a credit counselor and do what you can to get out of this problem But whatever you do, don’t hide from the new law. That does nothing.

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