Debt Consolidation and Credit Card Counseling

Personal bankruptcy filings may not be so personal after all

The Bankruptcy Abuse and Consumer Protection Act, passed into law this spring with the enthusiastic support of Congress, President Bush and the credit card industry, promises to reform debt law more than any legislation in the last thirty years.  This bill was written at the behest of the credit card and lending industry in order to eliminate the perceived problem of compulsive shoppers and gamblers who intentionally run up debt with no intention of repayment. The credit card companies say that these problem debtors cost the industry billions of dollars per year, costs which are passed on to consumers in the form of higher fees and interest rates. The thinking in Congress is that once this bill is passed, the number of personal bankruptcy filings will decrease, and the lending industry will pass the savings on to consumers. Will this happen?

The new law has many facets that complicate existing bankruptcy law. Anyone filing for personal bankruptcy must prove that they have undergone credit counseling during the last six months. Under current law, personal bankruptcy filers may have their debts wiped away under Chapter 7 of the Federal Bankruptcy code. This allows debtors to have a fresh start, although the filing will remain on their credit report for ten years. The new law requires Chapter 13 filings with a five year repayment schedule and more complicated paperwork that will require the aid of an attorney, thus insuring higher costs for the filing itself. Attorneys will also be held liable for the accuracy of the information provided in the filing. This will prompt some lawyers to raise their rates; others will simply stop handling such cases. In the short term, the law will also clog the courts as debtors rush to file before the October 14 deadline.

The worst aspect of all may be this - the law was passed with the assumption that most filings were done by reckless consumers. It appears that this may not be the case, and that many “personal” bankruptcy filings are actually small business filings by sole proprietors. In fact, studies show that business filings may be up to ten times more frequent than previously thought. This could seriously harm small business in America and could jeopardize the economy’s recovery from the slowdown of the last five years. The new law does not distinguish between a personal bankruptcy filing and one from a sole proprietor whose business has gone under. It doesn’t benefit anyone to force a small business owner, who may have simply suffered from the uncertainties of the business world, to undergo credit counseling designed to help consumers handle household budgets. Worse, forcing people to undergo counseling who don’t really need it takes away valuable counseling resources for those who could use some help. Since there is currently a lot of credit counseling fraud in the industry, this may turn an already bad situation into a disaster.

Congress may, in time, fix this boondoggle of a law if portions of it do not work as designed. In the meantime, attorneys and credit counseling agencies will be busy, the courts will be full and no one will benefit from the new law.

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