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Credit card companies encourage people to take on debt.

Who wins in this situation? The consumer or “the system”? Getting credit is very easy today and many take advantage of the endless offers only to end up in a bankruptcy situation. Now laws on bankruptcy have changed and are more difficult for the consumer.

Often laws and regulations are implemented to address a situation that only the minority of people are involved in and does not take into account what the majority of consumers are actually doing. Then the law penalizes the majority for the minority’s errors or stupidity.

Here is a question regarding such a situation which was posed to the Bankruptcy Advisor at Bankrate.com

Dear Bankruptcy Adviser,

I didn’t like that our government has made it more difficult to file bankruptcy. Will they stop making it easy for people to get into financial difficulty by sending unsolicited credit card offerings without having the potential debtor actually qualify for the additional debt before they are approved?—Louis

Dear Louis,
Your question indicates that you believe that part of the reason many people are forced to file bankruptcy has to do with the practices of the credit card companies. This is accurate, but not the whole story.

While it is true that credit card companies work within the limit of the law to encourage people to take on debt and then pay that debt off at extremely high interest rates, the real reasons that bankruptcy is more out of reach than ever has to do with legislation passed by the current Congress and President Bush.

Credit card companies felt that it was too easy to qualify for bankruptcy, especially for so-called “abuse filers”—people who aren’t in dire financial straits but declare bankruptcy as a way to skirt legitimate debts they can afford to pay. Credit card companies lobbied our country’s elected representatives and asked them to pass laws to prevent this. It was a good idea, in theory.

In practice, the laws increased bankruptcy attorneys’ responsibilities. This means that if an attorney submits a bankruptcy filing with inaccurate information in it, the attorney is liable. Of course, people lie to lawyers all the time (not always on purpose). This will probably raise every attorney’s liability insurance premiums. As well, the new legislation requires the attorney to make additional inquiries into the debtor’s financial world, which creates additional costs. This is the first domino—when the attorney’s costs go up, the client’s costs go up.

The second domino is that these increased costs have forced many attorneys who do bankruptcy work part time to stop doing it. So there are fewer service providers. Thus, the demand for bankruptcy is as high as ever, and the supply is shorter—this also raises prices.

So many people filed bankruptcy before the Oct. 17, 2005, law change that now collection agencies have far fewer accounts. This means everyone still delinquent and not eligible to file bankruptcy will receive more attention from collectors than ever before. This is the third domino: People are scared to file because they will be assaulted almost immediately by collectors. People with delinquent accounts will likely face legal action executed by the collection agency much sooner since there are fewer collection accounts.

This vicious cycle is fueled by inaccurate information. A fellow attorney told me that a popular radio host actually read an advertisement stating that under the new laws you will be obligated to pay back at least $10,000 of your debt. That’s true for a small percentage of the filing population, but the vast majority of people are still eligible for Chapter 7 and a fresh start. Research indicates that as many as 93 percent of people who file bankruptcy will still be eligible for a complete wipeout of all their debt.

In short, Louis, the new laws are problematic, and the business practices of credit card companies are dubious. The solution is relatively simple, but not always possible: Do your best to only take on debt you can afford.

Feel free to add your comments or concerns regarding this issue.

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