The Debt Slave Act of 2005, better known as the Bankruptcy Reform Act of 2005 has blown sky high. Bankruptcies are soaring in spite of a law designed to prevent that from happening. Credit card writeoffs are soaring as well.
Now Congress is looking to unwind some particularly nasty practices of the credit card industry. In response, banks have started self-serving programs designed to "help" consumers get out of debt.
Let's tie this altogether starting with Bankruptcies surge despite law meant to curb them.
The number of U.S. businesses and individuals declaring bankruptcy is rising with a vengeance amid the recession, despite a three-year-old federal law that made it much tougher for Americans to escape their debts, an Associated Press analysis found.Be Careful Of What You Ask
"There's no end in sight," said bankruptcy lawyer Bryan Elliott of Hickory, N.C., who is working seven days a week and scheduling prospective clients a month in advance. "To be doing this well and having this much business, it is depressing. It's not a laugh-a-minute job."
Nearly 1.2 million debtors filed for bankruptcy in the past 12 months, according to federal court records collected and analyzed by the AP. Last month, 130,831 sought bankruptcy protection -- an increase of 46 percent over March 2008 and 81 percent over the same month in 2007.
Congress voted in 2005 to make bankruptcy more cumbersome after years of intense lobbying from the nation's lenders, who complained that people were abusing the system. Before the move to change the law, bankruptcies were running at what was then an all-time high of about 1.6 million per year.
The tighter requirements initially appeared to work, with bankruptcies plummeting from a record-shattering 2 million cases in 2005 -- a total that reflected a rush to file before the new law took effect -- to 600,000 in 2006. But now bankruptcies are booming again.
In March, bankruptcy filings jumped the highest across the West. In Arizona, filings rose 91 percent from a year ago. They were up 84 percent in Idaho, 82 percent in California and 79 percent in Nevada, though those were trumped by Delaware, home to many large corporations, which saw a 127 percent jump.
Under the 2005 law, Congress imposed higher fees on those seeking bankruptcy and began requiring credit counseling sessions and a means test to assess debtors' ability to pay what they owed.
Lawless, the Illinois law professor, said his research found that the law simply increased the cost of filing by 50 percent and led many more people to cling to false hope longer.
Also, the law's test of a person's ability to pay off debts appears to have failed at one of its goals: steering debtors from Chapter 7, which allows people to sell off their assets to repay what they can and start again debt-free, and into Chapter 13, which places the filer in a repayment plan that can last for years. Chapter 7 cases accounted for 69 percent of all filings in the past year, compared with 71 percent in 2004.
Greedy card issuers got everything they asked for and then some in 2005. Having gotten their wish, banks went on a tear extending credit to the least credit worthy borrowers knowing that bankruptcy would be harder to declare and debts harder to discharge.
At long last this tactic has blown up in their faces.
Credit Card Reforms
On March 31, 2009 a Senate panel passed tough new rules to curb abuses.
Some major provisions approved would:
- Prohibit "universal default," a practice through which issuers use a consumer's history with another creditor to raise interest rates
- Prohibit "anytime, any reason" hikes in rates
- Prohibit charging interest on debt that has been repaid
- Require 45 days of notice before any rate increase
- Require full disclosure in statements of payment due dates and late-payment penalties
- Prohibit issuing credit cards to consumers under 21 unless they show they can repay the debt, or complete a certified financial literacy course
- Prohibit double-cycle billing, a practice in which charges are computed based on outstanding balances in billing cycles before the most recent cycle
- Limit certain abusive fees and penalties, such as charging interest on credit-card transaction fees, or charging a fee to allow a consumer to pay a credit-card debt
I wrote about those credit card reforms in New Credit Card Rules.
The credit card industry is getting what it deserves for their practices, even though a case can be made that such things ought to be left to the "free market" to solve. Then again self-modifying contracts under such terms hardly seems to be a "free market construct".Discover Card Affected By 2-Cycle Billing Revisions
Moreover, the reason people can get credit lines way bigger than they deserve stems from the Bankruptcy Reform Act of 2005 whose sole purpose was to make people debt slaves forever. That act is now blowing up, just as I predicted it would.
I consider 2-Cycle billing to be a huge ripoff. With 2-cycle billing you end up paying interest on debt before it is even due. For more on 2-Cycle Billing please see Read the Fine Print On Credit Cards.
Hopefully the law passes as outlined above and Discover Card and other 2-cycle card issuers are forced to end their consumer unfriendly practices.
Can We Be Friends?
I warned banks (in advance) of banks getting what they asked. Now I am warning consumers of banks pretending to be friends. Inquiring minds are reading that Banks are willing to help strapped cardholders.
However, it's the subtitle that's really important: But credit-aid effort doesn't provide consumers the whole story. Let's take a look.
TV and print ads invite credit-card holders struggling to make payments to visit HelpWithMyCredit.org or call 1-866-941-1030.Beware Of Bank Offers To Help
The coalition sponsoring the campaign, by Weber Shandwick's in-house New York ad agency Sawyer Miller, includes Bank of America (BAC) , Citigroup (C) , MasterCard (MA) , Visa (V) , Capital One (COF) and Discover (DFS). The coalition offers to pick up the tab for a caller's first credit counseling visit at participating accredited agencies.
"Overall, they (banks) are doing more to advance consumer financial literacy than they did before and that's good for the country," acknowledges Robert S. Green, a partner in the law firm of Green Welling LLP, San Francisco.
But Green, whose firm has multiple class-action lawsuits pending against banks, warns that the "HelpWithMyCredit.org" Web site lacks important educational information.
"People should know this is slanted from the bank's point of view," he says. For example, the Web site mentions the features and benefits of some credit cards, but fails to mention that cards come with arbitration clauses and class-action waivers. Such features, he says, may prevent cardholders from protecting their rights.
The "Help With My Credit" campaign comes as banks vehemently fight credit card consumer protection legislation making its way through Congress.
Green suggests that another less biased educational credit card resource is Consumer Action.
Consumers Union has established a Web site, Credit Card Reform, to encourage consumers to contact their lawmakers to stem abusive credit card practices.
Rule to live by: Whenever banks appear to be offering help, the odds are overwhelming that they are really offering to help themselves to your pocket book.
To be fair, I am quite certain some people benefit from these programs. However, when that happens, it's best to consider it an accidental byproduct of banks doing what is in their best interest, not yours.
When it comes to credit card counseling or foreclosures, your best option may be bankruptcy or walking away, not deals to pay back more than you can afford.
Only unbiased organizations will be looking out for you. That Bank of America, Capital One, and Discover are sponsors of "HelpWithMyCredit" is all you need to know to figure out the last thing you are going to receive is unbiased credit help.
Mike "Mish" Shedlock
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