Credit Card Debt Crunch — Consumers Face a Triple Squeeze Play

In March 23, 2006
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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.

 

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