Change in Bankruptcy Laws (12/16/05)

Sorry I haven't graced your presence with a Banker's Story in over a month. I've been trying to track down information on a new bankruptcy law that was passed in April and took effect on Oct. 17, 2005. The Office of the Comptroller of the Currency (OCC) and Congress wrote the bill entitled Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Of course there's several theories on how this law can effect you and me and how corporations, especially credit card companies, will respond. Instead of adding more theories, I'll give you a short summary of the facts regarding the bankruptcy portion of the law.

New Bankruptcy Law
In 2004, 72% of all bankruptcies files were Chapter 7 (CNN-Money). A distance second place was Chapter 13 filings. Chapter 7 bankruptcy allows a debtor to "write off" more of their debt, allowing what's known as a "fresh start." Chapter 13 requires a repayment plan of up to five years. It's up to the discretion of the court to determine which debts will be included in the repayment plan under Chapter 13. Any debts not addressed by the repayment plan, don't have to be paid. The new law will reduce the number Chapter 7 filings by requiring more consumers to file for Chapter 13 instead. This determination will be made by a formula that takes into consideration your "necessary" expenses and your annual income compared to your state's median income. What's that mean? It means you can't rack up a bunch of debt, then expect to clear it out by filing Chapter 7 bankruptcy. On top of that, you must meet with a consumer credit counselor at least six months prior to filing for bankruptcy.

Now, how will this effect you? Many credit card companies have begun to raise their minimum payment to encourage people to pay down their debt. If you carry large balances on your credit cards, you may have already seen this change. The average credit card balance is now $12,000. Many personal finance experts think this tougher bankruptcy law is just the beginning of stricter industry standards in an attempt to reduce the average consumer's debt.

Links Below
I've put a couple of links below. The first link is the OCC's summary of the new bankruptcy law. It reduces the 195 page bill to a 20-page summary. The second link is CNN Money's debt reduction calculator. It will allow you to input your credit card debt information, including interest rate and minimum payment. It will then calculate how long it will take you to payoff your credit card. For example, if your credit card balance is $5,000, your interest rate is 10%, and you pay $100 per month, it will take you almost 16 years to payoff that credit card (assuming you don't use it and the interest rate doesn't change). It will also tell you how much that timeframe will cost you in interest changes. By playing with the numbers a little, you can put together a manageable debt budget for yourself.

OCC Summary: http://www.occ.treas.gov/law/SummaryoftheHighlightsofBankruptcyLaw109-8.pdf

Debt Reduction Planner: http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp

I want to finish off this Banker's Story by telling you that I recommend bankruptcy only as a last resort to solving your debt problems. Filing for bankruptcy can hurt you financially for many years. I also want to say that I hope nobody benefited from this Banker's Story. Not needing to know this information is a good thing. If you know someone who might find this information useful, including the links, feel free to pass it along.