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August 15, 2010 -- In lieu of joining a credit counseling debt consolidation plan, more cash-strapped consumers are opting for bankruptcy. In 2010, consumer bankruptcy filings may exceed 1.6 million, cites the American Bankruptcy Institute. This present sign warns that the aim of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a federal bankruptcy law that was intended to decrease the number of bankruptcies, is seriously backfiring for the banks.
"The nation's increased bankruptcies have produced an oddball effect for credit card companies, which hoped BAPCPA would make it harder for many individuals to get protection from creditors", states Eric Santacruz, Vice President of the debt management company, Debt Free League.
Incredibly, the banking industry spent more than $100 million lobbying for the bankruptcy law according to the New York Times.
However, five years after Congress passed bankruptcy reform, many critics are now questioning if the banks' massive campaigning in Capitol Hill really worked.
Although the year after BAPCPA 598,000 consumer bankruptcy cases were filed, the numbers rapidly snowballed.
By 2008, amid the start of the U.S. economic recession, rampant foreclosures and unemployment radically altered the bankruptcy landscape. Banks and credit card companies, which lost trillions of dollars, became the biggest losers.
By 2009, consumer bankruptcies peaked at 1.41 million, up 32 percent from 2008, according to the National Bankruptcy Research Center. The number also represents the highest level of consumer bankruptcy filings since 2005.
Even business bankruptcy filings in 2009 saw a 16 percent increase from filings in 2008.
Although the recession has simmered, our economy still has an ugly outlook. Unemployment is still festering in numerous communities. Employers are still doing massive layoffs, or are on a hiring freeze. And in July alone, state and local governments cut 48,000 jobs. Thus, much more consumers will soon be seeking asylum from creditors via bankruptcy courts.
The tense economical climate has caused extreme financial hardships for many families. Sadly, despite receiving government bailouts, the banking industry isn't being too sympathetic.
At best, they're referring people to get help from credit counselors.
It's an eerie afterthought that the same banking institutions that felt the need for bankruptcy reform are the biggest backers of non-profit consumer credit counseling agencies.
Banks favor these agencies because their debt consolidation approach helps them recover total repayment of a debt's outstanding principal balance. In turn, credit counselors share with banks a fair-share agreement. And for every dollar that they collect from debtors, the profit isn't bad. The fee paid to them by banks can range from 7-15 percent.
However, critics question if this financial relationship is also a healthy marriage for consumers.
Arguably, observing their reported 21 percent completion rate, many consumers that decide to join a debt consolidation plan may be getting the short end of the stick.
Credit counseling works great for people who need minor debt reduction, since the key benefit it provides is interest rate reduction. Otherwise the process generally fails.
In reality, most victims of unemployment or people that have lost considerable income are terrible candidates for the debt consolidation strategy. For a person who is on the verge of bankruptcy, joining a credit counseling debt consolidation plan would not be very practical.
Debt Free League cites credit counseling as not being suitable as a bankruptcy alternative because most bankruptcy risks realistically can't avoid bankruptcy by merely reducing interest rates.
In contrast, the company defines debt settlement as a true bankruptcy alternative because it can reduce an entire consumer debt, including the principal balance, interest rate, and fees.
The resulting debt relief allows a consumer, who is struggling to make the minimum payments to pay off debts rapidly and in a more affordable fashion. Conversely, a consumer, who can afford to make the minimum payments, if not more, should consider debt consolidation.
To help insolvent consumers avoid bankruptcy, Debt Free League offers a debt settlement program called the Debt-to-Freedom Plan
Instead of creditors running the risk of insolvent consumers discharging their debts via bankruptcy, the debt settlement program negotiates with creditors to accept a lower settlement amount on their outstanding debts.
Santacruz adds, "Participation in a debt settlement program creates an opportunity for consumers to avoid bankruptcy and still reduce up to 60% of their total debt."
Less bankruptcies being discharged also creates a more positive outlook for creditors and the economy.
About Debt Free League:
The company offers consumers and small business owners a smart negotiation solution to resolve financial hardships via the settlement of personal, medical, and business debt. Interested parties may call 1.800.213.9968 for a free, no-obligation debt reduction consultation.
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