Understanding the Bankruptcy Abuse Prevention and Consumer Protection Act
In 2010, credit card bankruptcy filings dropped nearly 4-percent over the previous two years. According to the National Foundation for Credit Counseling, credit card debt accounts for one-third of all personal bankruptcy filings. The remainder is contributed to using bankruptcy to stop foreclosure and to obtain relief from medical debts.
Prior to 2005, credit card bankruptcy was at the top of the list of consumer debt elimination solutions. However, due to the extensive abuse of consumers racking up enormous credit card debt and filing bankruptcy to avoid repayment of debts, Congress enacted new bankruptcy laws making it considerably more challenging to obtain debt relief.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) require debtors to repay a portion of debts by establishing a Chapter 13 payment plan. Prior to BAPCPA many consumers with excessive credit card debt petitioned the court for Chapter 7 liquidation bankruptcy.
Chapter 7 allows debtors to liquidate non-exempt assets to pay off creditors and remaining balances are written off. This bankruptcy chapter basically gave consumers a free ride and allowed them to obtain a clean financial slate. But, BAPCPA changed all that and now bankruptcy petitioners are granted Chapter 7 only under extreme financial hardships.
Today, Americans seeking financial relief through bankruptcy must undergo credit counseling through a U.S. Trustee approved agency no more than 180 days prior to submitting their petition. Few people can go through the process without assistance from a bankruptcy attorney. Once a bankruptcy petition is filed, debtors must attend a 341 creditor meeting.
Creditor meetings generally occur within 30 days of the filed petition. Debtors are given the opportunity to work out a payment plan with creditors and explain the situation which caused their financial hardship. Afterward, the payment plan is presented to the bankruptcy judge for approval. Judges can approve, deny, or request changes made to the plan.
Once Chapter 13 payment plans are approved, debtors submit payments to the U.S. Trustee and distributions are made to creditors until debts are fully paid. Chapter 13 plans usually extend between two to five years depending on the level of outstanding debt.
A large percentage of debtors’ disposable income must be contributed to the bankruptcy payment plan. If debtors do not adhere to the plan, creditors and credit card companies can petition the court seeking dismissal of the debtor’s bankruptcy petition. Should this occur, debtors fail out of bankruptcy and lose all protection from the court.
Debtors’ credit is seriously damaged when debts are discharged through bankruptcy. Personal bankruptcy remains on credit reports for ten years and can cost debtors considerably more than costs associated with filing bankruptcy.
The negative impact against credit scores make is exceedingly challenging to obtain credit of any kind. Individuals who file credit card bankruptcy will find it next to impossible to qualify for credit card approval for at least three years. Their credit score can drop by 50 to 100 points; placing them in the poor credit category.
Lenders assess interest based on FICO scores, along with payment history and employment records. Those who frequently change jobs and submit late payments will be charged substantially higher interest rates than individuals possessing good credit scores.
Insurance provides often check credit reports and charge higher premiums to individuals with bad credit and those who have filed bankruptcy. Qualifying for a home mortgage loan after bankruptcy is next to impossible.
Car loans cost more because bankruptcy places consumers in the “high-risk” category. Landlords charge higher security deposits to tenants who have filed bankruptcy, as do utility companies and cell phone providers. In a nutshell, filing credit card bankruptcy has far-reaching effects and every type of credit costs more to obtain.
Consumers considering credit card bankruptcy should first take time to research bankruptcy alternatives. These can include: credit counseling, budgeting, debt consolidation, debt management, and debt settlement.
Use caution when retaining services for debt reduction companies that clam they can settle credit card debts for pennies on the dollar. Many debt management companies charge start-up and monthly maintenance fees to negotiate with creditors. However, there is no guarantee they will be successful in their endeavors.
Individuals in need of help managing debt or deciding if bankruptcy is their best option should obtain information from reliable sources such as the National Foundation for Credit Counseling at NFCC.org.