If bankruptcy reform legislation snaking through Congress becomes law, the financial services industry will emerge big winners.
“Right now, nearly 1.6 million people file for bankruptcy every year,” said Lynne Strang, spokesperson for the American Financial Services Association. “We anticipate that the new law, if passed, will cut down on the number of people who file for bankruptcy protection as a financial planning tool. As a result, the system will be able to operate more efficiently for those who are in true need of relief.”
When Congress first began courting bankruptcy reform legislation several years ago, estimates showed that, on average, a household paid an extra $400 per year in expenses lenders passed down to consumers in the form of higher interest rates, higher prices and other expenses.
“Projections on savings for this particular bill haven’t been calculated yet,” said Strang. “Everyone is waiting for the marketplace to react and adapt.”
For the first time, the bill would require borrowers to have financial counseling within 180 days prior to filing bankruptcy.
“We’ve taken no official position on the bill itself, but that’s one aspect we’re weighing in on,” said Suzanne Boas, president of the Consumer Credit Counseling Service (CCCS) of Atlanta, a nonprofit community service agency that opened an office in Jackson last year.
“When predecessor bills were first being drafted, there was, from the get-go, an interest in requiring consumers to have an objective third-party take a look at their financial situation before they were allowed to file bankruptcy,” she said. “At that time, we helped the drafters of the bill define that nonprofit agencies should handle credit counseling. We also had other checks and balances included to ensure quality services. If consumers are going to be required to take this important step in turning their lives around financially, we wanted criteria set so they could receive quality advice and care.”
Overall, it would cost borrowers more money to file bankruptcy. Nonprofit agencies like CCCS have traditionally not charged a fee for credit counseling, but the bill allows a “reasonable” fee for counseling services. Debtors may also have to pay for a mandated personal financial management instructional course required prior to receiving a bankruptcy discharge. That provision of the bill is not limited to nonprofits.
Also, depending on a “needs-based” formula in the bill that directs filers into Chapter 7, which does not require a repayment plan, or Chapter 13, which does, debtors may be forced to file the latter. If that provision remains in the final draft, unsecured creditors will primarily benefit.
“Big credit card companies have been supportive of this legislation all along,” said Boas. “It’s going to push more consumers into Chapter 13 and require them to pay back a portion of debt.”
If President Bush signs the new bankruptcy reform bill, the anticipated result is a one-third increase in the number of people seeking help from counseling agencies. Provisions of the bill, which would be administered by the U.S. Trustee’s Office, would become effective approximately six months after it is signed, probably around October.
“That’s our least busy time of the year,” said Boas. “We and other members of the National Foundation for Credit Counseling are prepared to meet the challenge of increased business.”
Under the current law, bankruptcy protection has increasingly become an easy option — a “first stop” rather than a “last resort,” said Chad Driskell, director of government relations for the Mississippi Bankers Association.
“Years back, bankers would often see customers fall considerably behind on payments before they filed Chapter 7,” he said. “Now, it’s such a financial planning tool — customers that are current on their bills are filing Chapter 7 — and this new law will stop part of that, and provide the means test before certain debts can be wiped away. We’re confident it will create a better system for all creditors, and therefore, create less debt that is abandoned, which drives up the cost of credit for all of us.”
Working out — over time
If the bill becomes law, the availability of credit will be increased over time, and the cost of credit should be reduced, said Charles Elliott, president and CEO of the Mississippi Credit Union Association.
“People truly in need will continue to have an opportunity to file bankruptcy, but it will also reduce abuses in the current system,” he said. “Many times, people that file bankruptcy end up in the same situation. The financial education component will provide them the opportunity to not get back in that position at some point later on.”
Because of the funeral of Pope John Paul II April 7, the House postponed voting on Senate Bill 256 until the following week. At press time, the vote had not taken place.
Contact MBJ contributing writer Lynne W. Jeter at email@example.com.