New York The new bankruptcy law makes it harder for consumers to walk away from credit card debt and other loans they're having trouble paying.
So that means credit card issuers, banks and other financial service companies, who lobbied hard for the law, will get back more of their money from future bankruptcies, right?
Yes, in some cases, but the reality is that in many others, lenders won't be assured of recovering much more money than under the old law. Or they'll have to wait longer to get it.
The law that goes into effect Oct. 17 has provisions likely to force more debtors into Chapter 13 bankruptcy programs, which require them to pay creditors on a court-approved schedule, rather than Chapter 7, which discharged most of their unsecured debts. An analysis by the research and consulting firm TowerGroup predicts that a smaller percentage of families will file for bankruptcy and that the share of Chapter 7 cases - currently more than 70 percent of personal bankruptcy cases - will decline.
TowerGroup also said credit card issuers would see a modest increase in the amount of money they recover.
But banking consultant Bert Ely, of Alexandria, Va., is skeptical that creditors will gain much under the new law.
"A lot of folks just don't have the income to handle repayment plans, or they'll start out under a plan and a few years down the road, they'll get into some trouble and not be able to complete it as envisioned," he said.
In addition, he added, it could be a "win-lose" situation for creditors because higher administrative costs in dealing with long-term collection programs will eat into the money they recover.
And, because most Chapter 13 users will be put into five-year repayment plans instead of the three-year programs currently in use, it will take longer for lenders to see their money back.
Auto lenders may do better than credit card companies because of a change in the so-called cram-down or strip-down provision on how loans secured by autos, trucks or other personal property are repaid in Chapter 13 cases.
Under the old law, if a debtor's car was worth $6,000 and the outstanding loan was $10,000, the lender would be assured $6,000 in payment but would have to stand in line with other creditors to try to recover the $4,000 balance. Under the new law, the borrower in many cases will be required to repay the entire $10,000 if the vehicle was purchased within 30 months of the bankruptcy filing.
Steve Bartlett, president and chief executive of the Financial Services Roundtable in Washington, D.C., said the bankruptcy law was about shared responsibility between borrowers and lenders because there are new requirements for each.
"The impact for the American consumer and our companies is that over the course of time, you establish a cultural shift ... in which you re-establish this sense in society that if you can pay your bills, you have to," he said. "There is no free pass."
At the same time, he said, "if there is a catastrophic event and people can't pay or don't have income, then bankruptcy remains available."
Bartlett pointed out that members of his trade association, which includes 100 of the largest financial service companies in the United States, also will have to comply with new Trust in Lending Act amendments that were tucked into the new law, including better disclosure on how "introductory rate" promotions work and the consequences for borrowers of making only minimum payments on their bills.
Many lenders also may find that borrowers have more leverage in getting concessions to help them avoid bankruptcy.
Joel Greenberg, president and chief executive of the Novadebt credit counseling agency in Freehold, N.J., said many creditors would give consumers a break on the interest rate and late fees on their outstanding balances, but not on principal. Under the new bankruptcy law, if a troubled consumer offers to pay 60 percent of a debt and the creditor refuses to negotiate, that creditor will find it harder to collect if the consumer declares bankruptcy.
"If creditors handle this appropriately, there could be more people helped with debt management programs - but they will need that break on principal," Greenberg said.
He said some financial institutions were discussing how to handle such concessions, but none have disclosed their policies.
"Everybody is watching to see what everybody else is going to do," he said.
Laura Fisher, of the American Bankers Assn. in Washington, D.C., which lobbied for the law, said that overall, it is aimed at cutting down on bankruptcy fraud, improving procedures for collecting and auditing consumers' financial records and sorting out those in dire straits who need bankruptcy protection from those simply avoiding repayment.
"It's a fairness issue rather than an economic issue," she said. "I think that's the way Congress saw it, too."