Millions of people have been shut out of the bankruptcy courts since the laws were changed in 2005. Bankruptcy filings in 2006 were one-third of the number filed in 2005. Filings have been on the rise again in 2008 because of the horrible economic conditions we are seeing, but if not for the law change, we would probably approach twice the number that filed in 2005.
The laws were changed primarily to help the banks avoid huge losses that were right around the corner. The lobbyists pushed the concept that many people were abusing the system though the reality was far different. The smart people in Washington and on Wall Street foresaw the bursting of the housing bubble as well as the drunken use of credit cards by people in trouble. The law change was seen as an answer for preventing a banking collapse. But as we have witnessed in recent weeks, the collapse was unavoidable.
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The irony is that the law change may actually have contributed to hasten the collapse. A record number of people are simply walking away from their obligations rather than consider alternatives. The hope of the establishment was that more people would be pushed into Chapter 13 Bankruptcy to reorganize their debt. This has not happened because the problems people are facing are so severe, that reorganizing is often not practical and with so many people owing more on their home than it is worth, it is not desirable.
In reality, Chapter 13 Bankruptcy has never been a good deal for consumers. The vast majority of people that consider this option are doing so to save a home from foreclosure. Most Chapter 13 Bankruptcies fail because the terms set forth by the court are not practical. A Chapter 13 plan requires the debtor to pay back a portion of the arrears owed on the mortgage each month onto of the regular mortgage payment. Since the regular mortgage payment proved to be too much in the first place, any amount above that is impossible.
What are better alternatives for consumers in trouble?
First, if the problem is unsecured debt, debt settlement is probably the way to go. It doesn't make any sense to depend on Chapter 13 Bankruptcy for unsecured debt when you can work out just as favorable a deal outside of the court. And by doing it on your own, you don't have to answer to anyone.
Second, if you are in trouble on a mortgage, try communicating with the lender. Don't kid yourself, the bank knows the deal. They are far more likely to negotiate terms that make sense now than ever before.
Third, if all else fails, just walk away. This is obviously the least desirable strategy but if you find yourself unable to put food on your table or depressed to the point of being unhappy all the time, simply stop making the payments. If you own a home, stay put until they force you out. You may be able to live rent free for a long time. And who knows, if things improve down the road it's never too late to pick up negotiations to fix the mess.
In the end, the only winners in this new Bankruptcy world are the lawyers who now collect heftier fees. Even the banks have become losers in this new scenario. Don't be surprised if you hear talk of changing the laws once again in the near future.
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