. . . but this bill is not the way to go

July 16, 1998|By Paula Langguth Ryan

THE CREDIT industry is unwittingly stabbing itself in the back by lobbying for the sweeping bankruptcy reform bill that was passed by the House last month.

Under the bill, the bankrupt won't be able to wipe away their debts using Chapter 7 bankruptcy. Instead, they would probably have to use the more restrictive Chapter 13 bankruptcy, which forces filers to pay on their debts over five years.

Creditors who believe the reform will cause more consumers to file a Chapter 13 "repayment bankruptcy" are in for a rude awakening.

Heavy-handed bill

Under Chapter 13, consumers are put on an unrealistically low budget and any disposable income of more than $50 a month is used to repay creditors. Under the bankruptcy reform bill, creditors anticipate that they will get at least 20 percent of what ,, they are owed or that they will be able to frighten budget-strapped consumers into avoiding bankruptcy.

Most people who file for bankruptcy under Chapter 13 don't repay all that they owe.

What makes creditors think that forcing more people to declare Chapter 13 will help them recoup any more money than they do? It's just not going to happen.

Even so, the bankruptcy reform bill may be just what the bankrupt need to get back on their feet, financially speaking. Too many consumers have bought into the concept of "easy-credit" with heart-wrenching commercials of father-son bonding, paid for by MasterCard, and trouble-free vacations, funded by VISA. But what consumers have really bought is expensive debt.

Credit cards came into common usage a generation ago. Yet only the middle-aged and older people can recall a time when cash truly was king and layaway was a common household word.

Today, if they are faced with the inability to get a fresh start under a Chapter 7 bankruptcy, many consumers -- unable to repay their debts in a reasonable manner without court intervention -- will simply go underground to avoid creditor harassment. They will simply walk away from their debts.

Crying over red ink

All of which will be a big blow to creditors. Creditors truly don't want customers who pay their bills. Several credit card companies made that perfectly clear last year when they attempted to close thousands of accounts because the account holders paid their bills in full each month. The bottom line is, creditors make their money off consumers who carry monthly balances. Creditors count on consumers to send in only minimum payments, so they can continue to rack up record profits with high interest rates.

The bankrupt who discover how to use credit properly can start cautiously rebuilding their credit and become financially responsible. However, if these Americans are forced to go underground rather than go bankrupt, the booming economy will suffer and creditor profits will plummet.

Maybe then creditors will finally end their Dr. Jekyll-Mr. Hyde routine, where they continually approve credit for financially strapped consumers and then turn them over to collection agencies, charge high interest rates and late fees instead of working out a realistic repayment plan.

Maybe then creditors will finally heed the advice of the National Bankruptcy Review Commission, which informed Congress that the way to lower bankruptcy rates is to help educate consumers about how to use credit properly , not preach to them to "only buy what you can afford now."

I predict that if the bankruptcy bill passes Congress, creditors will claim victory when bankruptcy rates start to fall. But they'll soon discover that they won the battle and lost the war as rising delinquency rates sink their ships.

Paula Langguth Ryan, author of "Bounce Back From Bankruptcy: A Step-By-Step Guide to Getting Back on Your Financial Feet," writes from Fairhaven.

Pub Date: 7/16/98

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