Charles Phelan

This item made the news today: “Late Payments on Credit Cards Showed Strong Decline in Fourth Quarter 2005.” (Source: American Bankers Association’s Consumer Credit Delinquency Bulletin) In the third quarter of 2005, the number of credit card accounts 30 days or more past due stood at 4.74%, while this figure dropped to 4.27% in the fourth quarter.

So why am I predicting that late payment rates will rise in 2006 when Q4 of 2005 shows a decline? Simple. The results from the end of 2005 include the fact that anybody thinking about bankruptcy had already filed before the new rules went into effect on October 17, 2005. So the decline is artificial at best, and hardly the good news that was reported today.

As we move through 2006, my prediction is that the late payment ratio will rise again. The main reason is because the banks are in the process of raising required minimum payments under pressure from the Office of the Comptroller of Currency. This is a well-intentioned attempt by the Fed to help consumers out of the “endless-minimum-payment” debt trap, but the real-world result will be higher default rates. I talk to consumers on a daily basis who are already struggling to maintain the bare-bones minimum payment level. Add just an extra $50-$100 to that minimum payment level, and many consumers will simply not be able to keep up. So I think I’m pretty safe in predicting an increase in the default rate.

As actual results come in later this year, I’ll post the figures here on this blog. The previous record was 4.81% for the second quarter of 2005. I predict that we will set a new default record and top 5.0% for the first time in the third quarter of 2006. Stay tuned …

And, if you’re already feeling the pinch of the higher minimum rates, you should consider the debt settlement strategy as a means of dealing with the problem.

We set a new record for personal bankruptcy filings in 2005, with a total of 2,039,214 consumer filings. That’s a 30% increase over the prior year. Of course, some of the surge has to do with negative publicity surrounding the new bankruptcy law that went into effect in October 2005. Approximately 400,000 of those cases were under Chapter 13, with the rest being Chapter 7 bankruptcies. It will be interesting to see the statistics later in the year, when we will have a better idea of the effect of the new law on the pace of filings, as well as its effect on the ratio of Chapter 7 to Chapter 13.

Lost is all this new data and hoopla over the bankruptcy law is a simple fact: Many of these bankruptcy filings were not necessary. I’m not talking about the usual media disinformation about “deadbeats” taking advantage of the system. That has proved to be a hollow and false excuse for passage of the new law. (See my March 20th post on this subject.) No, I’m talking about the reality that many people are FORCED into bankruptcy when they would truly rather avoid it. Consumers often get pushed headlong into bankruptcy by a combination of (a) predatory practices on the part of banks and financial institutions that profit from consumer indebtedness, and (b) aggressive collection tactics. The Federal Trade Commission logged more than 58,000 complaints last year about collection abuse. Since that is the barest tip of the iceberg (most people just take it and do not complain), is it any wonder that a consumer otherwise motivated to avoid bankruptcy is forced to it by abusive collection techniques? I’m not saying that the collection industry is evil. It provides a necessary function in our economy. Nor do I have anything against people who collect for a living, even though the industry has more than its share of bad apples.

My message here is simple. Bankruptcy can often be avoided by educating consumers about the option of debt settlement, especially the self-help variety, and by teaching them how to deal with collection tactics. I’ll discuss the problems of third-party professional debt settlement in other posts. For now, I want consumers to realize that avoiding a trip to bankruptcy court is simply a matter of (a) getting educated about how the debt collection process works, (b) developing a financial game plan that makes sense for your circumstances, and then (c) getting on the phone with your creditors with the goal of working things out amicably. It’s called taking responsibility and then taking action. It’s as American as apple-pie. It works, and the financial media is irresponsible for not discussing the most viable option of all for debt resolution. So get educated, take charge, and work things out. It really is that simple.

1. Visitors are welcome to submit comments to any posts on this blog. Discussion and comment is encouraged.

2. Registration is not required to read this blog or submit comments to posts.

3. All comments are subject to moderator review and will not appear until they have first been approved. We reserve the right to reject submitted comments if they are deemed inappropriate in content.

4. Since ALL comments are reviewed before publication, please don’t waste our time or yours trying to spam this blog to obtain backlinks. Also, comments that contain profanity, off-color remarks, racial overtones, or other inappropriate material will be deleted.

Charles J. Phelan
Manchester Publishing Company
1835 S. Centre City Pkwy
Suite A-507
Escondido CA 92025

Telephone: (866) 515-2360

Website: https://www.zipdebt.com

Email: [email protected]

Let’s call 2006 the year of the triple squeeze play against the indebted American consumer. With consumer debt at an all-time high, are things getting easier for people? Are there more options available for dealing with problem debt? No. It’s exactly the opposite. At a time when people most need help, they face a tougher set of challenges than ever before when it comes to tackling debt.

Here’s what I mean by the triple squeeze play:

1. The new bankruptcy rules have made it much tougher to qualify for Chapter 7 and get a fresh start, and Chapter 13 bankruptcy also comes with some strict new rules. Basically, the new law says that if you can afford to pay $100 per month to your creditors, Chapter 7 is out and you must file Chapter 13 instead. Instead of a fresh start, you’re looking at a five-year payback commitment. Don’t think you can afford $100 per month? The courts may not agree. That’s because your “allowable” expenses are defined by the IRS collection guidelines, not your actual documented expenses. The new rules also mean more liability for bankruptcy attorneys, who are now required to certify their clients’ financial documentation. This exposes them to greater risk. Consequently, the legal fees associated with filing bankruptcy are on the rise. Many individuals will find themselves “too broke to go bankrupt”!

2. Credit card banks are raising minimum payments under pressure from the Office of the Comptroller of Currency. The idea is to force people to pay down their debts faster, since the existing minimum payment structure was really just a trap for the unwary. Under the previous system, payoff times of 20, 30, or even 40 years were common. To offset this credit card debt slavery, the OCC has forced banks to require higher minimums so that more of the payment goes to reducing the debt balance instead of paying only the outstanding interest for that month. A good idea in theory. But what happens if you are already struggling to keep up with the original minimums? Expect this payment increase to lead to an increase in the number of people defaulting on their credit card obligations.

3. The credit counseling industry is under attack, with the IRS revoking non-profit exemptions left and right, exactly at the point in time when credit counseling has become mandatory under the new bankruptcy rules. To date, more than 30 credit counseling agencies have had their non-profit status revoked. Yet the new BK law requires the debtor to obtain a counseling session with an approved non-profit credit counselor before being permitted to file bankruptcy. By the time the IRS finishes its ongoing audit of the credit counseling industry, we can expect fewer and fewer legitimate agencies to remain in business. Will they be able to keep up with the demand?

The above three factors are coming together in 2006 to make life very difficult for consumers trying to get a handle on their problem debts. This triple squeeze play against consumers is one more reason why I’m a fan of debt settlement, especially do-it-yourself debt settlement. Why go through the hassle of Chapter 13 when you can negotiate your own deals with your creditors and not have to involve the courts? The minimum payments then become totally irrelevant, since you’re haggling over principal, not interest rates or payments. And credit counseling also becomes irrelevant when you take matters into your own hands and negotiate settlements with your creditors. Debt settlement already had a lot going for it before the triple squeeze play of 2006. Now it makes even more sense.

Under the new bankruptcy rules, a lot more people will be forced into Chapter 13 bankruptcy versus the preferred Chapter 7. The major difference, of course, is that Chapter 13 represents the worst of both worlds. You get the giant B-word tattooed to your forehead (well, your credit report anyway, which amounts to the same thing), PLUS you get to pay back a big chunk of the debts included in the bankruptcy. At least with Chapter 7, you get to wipe away the unsecured debts and truly start fresh. Not so with Chapter 13, where you are on the hook for FIVE YEARS. With many more consumers being faced with Chapter 13, it’s appropriate to compare this form of judicial torture to the alternative of debt settlement.

In many respects, debt settlement is an informal version of Chapter 13, since a percentage of the debt is paid back over time under both of these approaches. However, bankruptcy is always a matter of public record, whereas debt settlement is a private matter between you and your creditors.

Let’s compare these two methods of dealing with problem debt across a variety of important factors:

Average percentage of debt to be repaid: 30% to 50% in both systems.

Duration of program: 5 years with Chapter 13, versus 6 months to 3 years for debt settlement, depending on the monthly budget and other available financial resources.

Who has control over the program: With Chapter 13, the court has control. Debt settlement is controlled by the consumer.

Privacy: Chapter 13 becomes public record, while debt settlement is a private out-of-court matter.

Impact on credit: Bankrutpcy remains on the credit report for 10 years, and may affect future job or loan applications beyond that. With debt settlement, negative remarks remain on the credit report for up to 7 years, but most consumers recover credit-worthiness within 1-2 years after finishing the program.

Creditor lawsuits: These are blocked by bankruptcy, and this is the one area where bankruptcy excels. However, with debt settlement, lawsuits can normally be avoided through the negotiation process.

Payment flexibility: With Chapter 13, the court determines the monthly payment, and that amount is fixed for 5 years, leaving the consumer with no flexilibity to make adjustments for unexpected expenses. Debt settlement is handled at the pace of the consumer and is very flexible in terms of funding structure.

Living expenses: In Chapter 13, allowable living expenses are determined by the court based on IRS schedules. With debt settlement, living expenses are rarely disclosed to creditors.

Costs (fees, etc.) for professional assistance:

Chapter 13: $1,200 to $1,800 average, normally paid up front; will probably increase under the new law.
Debt Settlement: $3,000 to $5,000 averages spread over 10-18 months; may be much higher.

Costs (fees, etc) for do-it-yourself approach:

Chapter 13: Not recommended.
DIY Debt Settlement: $397 for audio-CD training and follow-up coaching

So it’s pretty obvious from the above that debt settlement is an attractive alternative to Chapter 13 bankruptcy. The next question is whether to hire a third-party debt settlement company or to negotiate with your creditors on your own. There are some important reasons why the do-it-yourself approach is superior to paying $1,000s to a third-party debt company. Click the link in the upper left of this page to download a free 32-page report that goes into more detail.