Charles J. Phelan
Manchester Publishing Company
1835 S. Centre City Pkwy
Escondido CA 92025
Telephone: (866) 515-2360
Email: [email protected]
Charles J. Phelan
Manchester Publishing Company
1835 S. Centre City Pkwy
Escondido CA 92025
Telephone: (866) 515-2360
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.
Debt collection attorneys who file affidavits in state courts in order to obtain wage garnishments can be sued by consumers under the Fair Debt Collection Practices Act. This key decision, unheld on appeal to the 6th Circuit Court of Appeals, is an important victory for consumer advocates and other critics of the collection industry. For decades, collection attorneys have been filing bogus documents with the courts, and getting away with it because of supposed “immunity” as a “witness” in the case. The real-world result of this loophole has been extensive abuse of the rules. Basically, in practical terms, a collection attorney has been able to file a false affidavit about their knowledge regarding a debtor’s ability to pay a debt. Even in cases of obviously false or bogus statements or documents, consumer victims have been blocked from suing the collection attorneys because of this immunity exemption. In ruling that this exemption does not apply to collection attorneys, the 6th Circuit Court of Appeals got it exactly right.
What’s the practical effect? Well, for starters, collection liars (sorry, lawyers) will have to pay a little more attention when they sign their name to the claims documentation. What’s important to understand here is that most collection attorney firms are little more than collection agencies headed by an attorney. Since they deal on a volume basis, thousands of files run through their office on a monthly basis. Because of the immunity factor, collection attorneys in the past have thought nothing of rubber-stamping huge volumes of documents for submission to the courts, with little or no concern for factual truth. A good example is the case that led to this decision. A collection attorney obtained a default judgment against a debtor, and then filed an affidavit with the court when seeking to collect via wage garnishment. The affidavit stated that the collection attorney had a reasonable basis to believe that the property to be garnished (i.e., income), was not exempt from garnishment. Problem: The income in question was from Social Security benefits, which are exempt from garnishment. So the collection attorney filed a false affidavit, got sued for it, lost, appealed, and lost again. Naturally, consumer attorneys love this decision, while those in the collection industry hate it. Of course, the losing party is attempting additional manuevers, but the 6th Circuit Court wrote that “the purpose of immunity is to preserve the integrity of our judicial system, not to assist a self-interested party who allegedly lies in an affidavit to initiate garnishment proceedings.”
Now at least collection attorney paper-mills will have to exercise a little caution before filing undocumented declarations about debtors’ assets, or risk getting counter-sued for violating Federal law. It’s about time!
A big “thank you” to the National Association of Consumer Bankruptcy Attorneys. In a recent press release, they reported on the results of a survey of more than 60,000 consumers who were filing for bankruptcy under the ridiculous new law that went into effect last October. One of the silliest aspects of the new law is that it requires a credit counseling session within 180 days prior to filing. Leaving aside that this is a total joke (more later), the study found that 97% (basically, everbody) that went through the counseling session did in fact qualify for bankruptcy, and did not qualify for a “debt management plan” through a counseling agency.
In other words, of 61,335 consumers surveyed, more than 59,000 of them were flat broke. A great big raspberry and “I told you so” to the the prized collection of idiots who crammed this stupid law down the throats of the American public. It’s a bad law, badly written, badly enacted, and passed for all the wrong reasons. Supposedly, you see, there were all these “deadbeats” out there gaming the system, racking up huge debts, and then walking away without consequence in bankruptcy. Yeah, right. If you’ve worked in the consumer debt field at all, as I have since 1997, you already knew better. Sure, there are probably a few instances of abuse by consumers. But the vast majority of people seeking bankruptcy are doing so because they have been pushed to the wall through job loss, medical problems, or other legitimate financial hardship, and not because they want all their stuff for free.
All the new law has done is to make it harder for people who most need relief to obtain it. Thank you, Congress. It was the illustrious House Judiciary Chairman, F. James Sensenbrenner, Jr. (R-Wisconsin), who said the bill would stop “billions of dollars in losses associated with profligate and abusive bankruptcy filings.” And Senator Charles Grassley (R-Iowa) said the new law would clean up “a convenient financial planning tool where deadbeats can get out of paying their debt scott-free …” Well, Mssrs. Sensenbrenner and Grassley, you were wrong, period. But I suppose you don’t want to be bothered with the facts. Besides, those campaign contributions are already a done deal, so no worries.
What really happened here is that there never was any pattern of abuse to begin with. That was a smoke-screen of creative fiction devised by the lobbyists working for the credit card industry. No, what really happened is that the banks have hooked the American public on the plastic addiction, jacked up interest rates so high that struggling consumers are forced into default, and then applied for some corporate welfare from Congress to ensure a few more dollars back to the bottom line. I have nothing against banks, mind you, and I’m all for profit-making. But this law merely rubbed salt into the wounds of already exhausted consumers who needed the protection of our legal system. Instead, they have been thrown to the wolves courtesy of Congress and the banking lobby.
By the way, I mentioned above that the whole credit counseling requirement under the new law is a joke. First, credit counseling doesn’t work very well. According to the Consumer Federation of America, the industry has a 76% failure rate, so that means 3 out of 4 people aren’t able to complete such a debt management program. But that’s not the reason it’s a joke. The law doesn’t require people to actually go through a counseling program, only to have a 90-minute session where someone tells them they should pay their bills. Think traffic school. Think online traffic school. Read a few boring lessons. Take a quiz. Get a certificate. Voila. No more traffic violation. Same thing with the credit counseling requirement. How is this helping people? But as I say, credit counseling really doesn’t work anyway. Oh, and right now the IRS is attacking non-profit credit counseling agencies left and right. So far about 30 major agencies have had their non-profit status revoked. It just keeps getting better and better …
My one beef with the report by the NACBA is that they did not mention the alternative of debt settlement. No surprise there. Bankruptcy lawyers have a vested interest in avoiding that subject. Consumers can settle their own debts out of court without paying thousands in fees to attorneys or settlement companies. But you won’t hear that from the BK attorneys, the banks, or the credit counselors. Hey, at least you heard it from me. Check out my DIY seminar if you want to learn more, or download the free 32-page report. Get educated. You have options the media isn’t telling you about. Cheers.
Debt settlement is just as much about managing risk as negotiating savings. The 36-48 month programs offered by most debt companies have high risk for collection lawsuits. It’s far more effective to “fast track” debt settlement in 12-18 months.
Instead of paying fees as high as 20-30% of your TOTAL DEBT, it’s far more affordable to work with a professional consultant who only charges 20% of the SAVINGS achieved via the negotiations. This approach saves you money and creates a win-win scenario.