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How Will the New Bankruptcy Laws Affect Credit Negotiations?

by Charles J. Phelan


In April 2005, Congress made sweeping changes in U.S. bankruptcy law that will go 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."

Some of the folks who've purchased the Debt Elimination Success Seminar™ have asked what effect the new law will have on the practice of Debt Negotiation (also called Debt Settlement). Will creditors still be willing to negotiate with consumers seeking to avoid bankruptcy? Will lump-sum settlements for 30%, 40%, or 50% still be possible now that this tough new law has been passed?

The answer is "YES." It will be "business as usual" in the collection industry. People that choose to file bankruptcy will definitely be affected for the worse, as I'll outline below, but those who choose to privately negotiate their way out of debt will notice very little difference. Creditors will still negotiate. Good deals will still be available. And nothing much will change in the world of collections.

Since my whole approach is about AVOIDING bankruptcy, I won’t go into a detailed analysis of the provisions of the new law. But the net effect is that many (if not most) people seeking relief under Chapter 7 bankruptcy will be forced to file under Chapter 13 instead. Consequently, it will be MUCH more difficult to fully discharge debts in a bankruptcy than ever before. Most bankruptcy petitioners will be forced to pay back part of the debt over a 3 to 5 year schedule set by the courts. One of the worst aspects of the new bill is the use of IRS “allowable” expense schedules for determining your monthly budget. In other words, your actual living expense are thrown out the window in favor of the IRS standards. (And we all know how generous the IRS can be!) So if your actual rent is $1,300 per month, and the IRS says it should be $1,045 for your state and county, that’s just TOUGH! The court will only allow the $1,045, period.

In short, people attempting to file bankruptcy after October 17, 2005 are in for an extremely rude awakening! Goodbye cell phones, cable TV, high-speed Internet access, movies, meals with the family, and anything else beyond the minimum allowable expenses as determined by the IRS and the courts. That's why alternatives to bankruptcy will be needed more than ever.

Now, with these tough new bankruptcy rules, will consumers still have any leverage with their creditors when it comes to negotiating settlements? YES! In fact, I believe it will lead to an INCREASED willingness to settle on the part of many creditors.

What makes me so certain that the banks will still be eager to settle for 50 cents on the dollar or less? Simple. Two words: STEALTH BANKRUPTCY.

After October 17, 2005, hundreds of thousands of Americans are quickly going to discover the new reality of this horrible law, and they are going to forgo the court system of filing bankruptcy. Instead they are going to do what's called “stealth bankruptcy.” A stealth bankruptcy is when you dodge your creditors by moving (with no forwarding address), changing your phone number, and dropping off the radar screen to live on an all-cash, no-credit basis. Many people already choose this path rather than deal with the invasion of privacy that comes with formal bankruptcy. After the new law goes into effect, HUGE numbers of people will go this route, which means that the creditors will actually be in a WORSE position than before the bankruptcy law was revised.

That's one key reason they'll be more willing than ever to take a good deal when you offer it to them. They will try to convince you otherwise, of course, but the reality is that it's always about the bottom line. And when it comes to calculating the bottom line profit or loss for the month, a bank always prefers to collect money NOW rather than YEARS from now. Remember:

     1. The creditors don't know whether or not you'll still qualify for Chapter 7. They still face the risk that you will be able to discharge your debts in full, which means they get NOTHING.

     2. Even if you file Chapter 13 under the new guidelines, the creditors will still only receive 30% to 50% of the debt on average (much less in some cases).

     3. Under Chapter 13, it will still take 3 to 5 YEARS for them to recover that 30% to 50%.

     4. A lump-sum of 30% to 50% TODAY is far better than the same amount collected over 3 to 5 years.

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. They may even make false statements, such as, “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 will be “business as usual” in the world of collections.

Customers of the Debt Elimination Success Seminar™ learn how to eliminate their debts quickly and safely through the process of creditor negotiation, WITHOUT having to file bankruptcy. When the new law goes into effect on October 17, 2005, the techniques and methods taught in the seminar will be just as effective as ever!


Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt management firms, he is the author of the Debt Elimination Success Seminar™, which provides comprehensive instruction in do-it-yourself debt settlement that saves $1,000s in fees.

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