Personal bankruptcy law changes may not benefit lenders as much as they thought

With the new, oddly named, Bankruptcy Abuse and Consumer Protection act set to take effect this month, consumers with problem debt are scrambling to find a solution. The entire legal industry is more or less in chaos as calls from would-be filers are coming in unprecedented number due to confusion over the new law. Many people don’t know if they can file at all after the new law takes place, and lawyers are simply swamped with calls from confused debtors. The cases are backing up, the lawyers are tired and overworked, and those people who can find a lawyer to take their case are discovering the many attorneys have doubled or even tripled their fees.

And to what end? The new legislation was passed earlier this year after years of intense lobbying by banks and credit card companies. They argued that consumers were carelessly running up thousands of dollars worth of debts that they had no intention of repaying, only to have those debts forgiven by the courts under existing bankruptcy law, which was viewed by the credit and banking industries as too lenient. They asked for, and received, much stricter Federal law.

They got it. It will now be more difficult then ever for the average debtor to have his or her debts forgiven by the courts through personal bankruptcy. Previous cases that were resolved under Chapter 7 of the bankruptcy code, which allowed debt forgiveness, will now be resolved by under Chapter 13, which requires a repayment plan. The theory is that those people who run up frivolous debts will now be forced to repay them. This will save the lending industry millions of dollars and presumably they will pass on those savings to consumers in the form of lower prices, fees, and interest rates.

But will the new law actually put more money into the hands of creditors? Probably not. People who file for bankruptcy have already reached a point where they simply cannot pay their debts. Contrary to the arguments put forth by banks, most people don’t file on a whim; they do so because they’ve lost their jobs, had a catastrophic illness or have had some other disaster befall them, such as what happened to the victims of Hurricane Katrina. Simply making it a law that the debtors need to repay will not provide them with the means to do so, and repayment plan or not, these debtors may not be able to repay if they simply do not have the money. What little money the creditors see may come over periods of years, and may not even represent the full sum.

In all likelihood, creditors will see no more money than they did before. The end result will simply be more inconvenience for everyone else.

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