Regulation changes make 'double whammy' for debtors
Regulation changes make 'double whammy' for debtors
Counselor, bankruptcy attorney advise budget management
MOSES LAKE — Karin Smith used to work part-time. Now, she's gone full-time.
That's due to an increased volume of people coming in to the Moses Lake office of Consumer Credit Counseling Services for help with their debts, compared to the same time last year.
"Usually right now it's kind of slow for us until about March," said Smith, counselor at the Moses Lake office. "We've been booking out, pretty much."
That may be due to two changes in recent months that could have an impact in peoples' pocketbooks — a change in minimum credit card payments and a change in bankruptcy filing laws that may have left many people incorrectly believing they are no longer able to file.
'It's just going to make it really hard for people'
Many callers tell Smith they're calling in because of the increase in credit card minimum payments.
In 2003, Smith explained, the board of governors of the Federal Reserve System, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of the Thrift Supervision approached the credit card companies and said consumer debt was so great the companies needed to help consumers get out of debt faster.
"Basically, they approached them and said, 'We want a payment that covers the fee to finance charges, plus 1 percent of the principle,'" Smith said.
It took the companies almost two years to comply with the request, Smith said, explaining companies said they had to change and update the system. The new regulations went into effect in December and January.
"That means if you would have a balance of $1,000 on your credit card, and the minimum payment used to be $20, now it jumps up another $20," Smith said. "If you figure the average American family has five to eight cards, and if all of them got affected and they all have $1,000 balance, you have an additional outgo of $100 to $160 per month."
Rising costs of propane and gas, and the rise in prices of other items impacted by the fuel costs will also trickle down to the consumer, Smith said.
"It's just going to make it really hard for people," she said, adding that those people who don't make a payment on their credit card bills will get hit with a late fee, and then have to make up the payment they failed to make the next month, in addition to the regular payment.
"There's a lot of people that are just getting by on their credit cards," said Scott Kilpatrick, attorney and counselor-at-law with Affordable Bankruptcy Services. "It's costing them more to live each month than the money that they have coming in, and they're doing deficit spending."
People in too deep of credit card debt, finding it difficult to buy food for the family and pay for cars, rent and gas and pay the minimum monthly payment are going to have "a world of hurt" once the increase hits them, Kilpatrick said, because they won't be able to make the credit card payments.
Smith advises people budget a little better, and look at costs they are able to reduce, because there's no way they can negotiate the minimum costs of credit card payments. They can also contact any reputable counseling service, she said.
The change in credit card regulations has nothing to do with a new bankruptcy law that says anyone who wants to file for bankruptcy has to see a court-certified organization before the attorney can do any work for them, Smith said.
"It's kind of like a double whammy," she said, adding that reports indicate more low-income families are going to be forced for file for bankruptcy.
Kilpatrick used the exact same phrasing, and called the timing sad. He's already heard from several clients who have received notification of the monthly increase, he said.
'A lot of people just got caught up in that hysteria'
Kilpatrick called the bankruptcy reformat the most significant overhaul of the bankruptcy system since the 1800s.
"Bankruptcy attorneys, judges, the government office, the U.S. Trustee, everybody is trying to get a handle on what all the changes mean and the scope of them," he said, noting the new bankruptcy laws are very poorly written. The credit card companies spent more than $100 million lobbying Congress for the changes over the last 10 years, and essentially wrote the new laws, he said, making it more difficult to understand.
Since the laws changed Oct. 17, Kilpatrick's impression is many people are scared of them.
"The word on the street, I guess, is that you can't file bankruptcy anymore," he said, noting that's an incorrect assumption. "There was a real hysteria that occurred nationwide prior to the effective date of the law change. A lot of people just got caught up in that hysteria, that they wouldn't be able to file bankruptcy again after that date."
As a result, an unprecedented number of bankruptcy filings took place prior to the law change, exceeding 2 million filings in 2005 for the first time in the country.
In the eastern district of Washington, according to the United States Bankruptcy Court, the number of filings in October 2005 reached 3,133, up from 1,229 in September. In November, they dropped off to 72 in November, and 133 in December.
Kilpatrick believes the lower numbers are because anybody that was borderline bankruptcy got their bankruptcies filed before the law changed, and the rest do not know that they can still file for bankruptcy.
'More complicated and more hoops to jump through'
Most people will still be able to file a Chapter 7 bankruptcy to eliminate their debts, Kilpatrick said.
"It's just more complicated and more hoops to jump through," he said.
Before filing a bankruptcy, a client has to have a debtor counseling session, and receive a certificate issued by an approved counseling agency within the six months prior to filing for bankruptcy, Kilpatrick said.
After filing, the client has to go through a financial course, getting a certificate of completion, or else the debts survive the bankruptcy, he added.
"It's an additional cost for the bankruptcy," he said, noting that the range of the additional cost as far as debtor counseling fees to people filing can be from $95 to $100 for a single person and $105 to $200 for a married couple. Congress also increased the filing fee from $209 for a Chapter 7 bankruptcy to $274, and the fee will increase to $299 in about 45 days, Kilpatrick observed.
"What Congress did, they imposed a new layer — it's called a means test," he said, noting that the test will determine whether a person has the means to pay back his or her creditor. The means test is based upon the gross income of the person getting ready to file bankruptcy, taking the monthly average income from the six months prior to filing, and multiplying by 12 for the annual income. If someone is below the threshold, he or she can still file a Chapter 7 bankruptcy.
If above the threshold, a person has to file for a Chapter 13, which is essentially a three- to five-year debt repayment plan to repay whatever he or she can afford. Remaining debt at the end of that period will be discharged, Kilpatrick explained.
"When people are financially maxed out, the worst thing that they can do is nothing," he said. "They need to get some sort of plan into place to deal with the debt."
That doesn't mean a person has to run out and file bankruptcy, he added, noting bankruptcy is always a last resort. Kilpatrick advised starting with consumer credit counseling or gathering information and talking with a bankruptcy attorney, most of whom give free consultations on the first consultation, to help make the decision of what to do.
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