The New US Bankruptcy Law

Discussion in 'Economics' started by SouthAmerica, Oct 18, 2005.

  1. .

    October 18, 2005

    SouthAmerica: Regarding the new bankruptcy law that were effective as of October 17, 2005 in the United States.

    The changes in the bankruptcy law were made to protect the US financial institutions as much as possible from the coming collapse in the price of real estate, stock market decline, and the massive credit card debt default from millions of credit card holders. Millions of Americans will be in trouble financially, and they will not be able to have a fresh start as in the past.

    The changes in the minimum payment that people have to make every month on their credit cards - which will become effective as of January 2006 - also will compound the financial problems to most Americans.

    Never mind that they are being squeezed by the high cost of gasoline and will have a shock when they receive their heating bills for the coming winter. On top of that the monthly mortgage payment of many people will increase because of the increase in interest rates.

    It will not be a pretty sight for most Americans what is in store for them in the near future related to price increases and declining value for their properties and stock holdings.

    Other sectors of the population will receive drastic cuts on their health benefits, and on their pensions. And they will have to spend more of their resources related to health care.

    Americans will be hit from every side with higher costs, and declining wages and benefits.


    February 2005

    I posted the following in the "PBS" message board on February 2005:

    Here is why it is a Bush administration’s top priority, to change the bankruptcy laws in the US. Here I am quoting from parts of various articles that I wrote over the years.

    Keep in mind when prices decline in the economy, the liabilities doesn't go away - You still have to pay your mortgage to your bank, even as the price of the property is declining If you lose your job, and is able to get another job earning 30 to 40 percent less, you still have to pay your old liabilities, your creditors don't give you a reduction on your outstanding debt because you are making less money to pay your bills.

    “Seems to me that the financial markets of the world lost any common sense, and they are driven only by hype and nothing else. In the new deflationary environment that we will be living in the future, God knows for how long, the US economy is in a position for a repeat performance of the great depression of the 1930's.

    It is like a recipe for big trouble to be in debt during deflationary times. The housing bubble is ready to be burst, just like the stock market bubble. From that point on, consumer confidence and everything else will go down hill. Companies lay off people, there is less buying power, they lay off even more people, we have a deflationary spiral and so on. People with no jobs can't pay the bills including credit cards and mortgages.

    People have to sell their houses, and the flood of new houses on the market depresses even further the market price for houses. After a while, if you have some money, you can buy what used to be a $100,000 house for about $ 15,000. The last time we had deflation on this large scale in the US was in the 1930's and very few adults remember those days.

    Recent experience in Japan and here in the US showed us how quickly asset values (in equities or real estate) can melt away. Remember, asset values decline very fast but the liabilities don't go away. If you just bought a house for $400,000 and have a mortgage for that amount, when housing values decline in the near future and that house is worth only $200,000 or less, you still owe the bank the $400,000. Your debt doesn't go away, as asset value is declining. I am not surprised that they are trying very hard in Washington to change the bankruptcy laws. The creditors know that massive losses are on the horizon related to the deflationary wave that will affect the US economy.”

    “The Coming Economic Depression

    We are in the beginning of a deflationary cycle; that means that prices will decline. The economies of Japan and Germany are already suffering because of this deflationary spiral. Few years ago many economists claimed that they had tamed the economic cycle, and that deep recession and depressions were things of the past. When I read articles about that, I thought they were completely wrong.

    The truth is the world is overdue for a new economic depression. Historically we had a depression in the world once every 55 to 60 years. The last world depression was over 60 years ago. A Russian economist, Nikolai Kondratieff, published a study in 1926 showing that a very long-term economic cycle existed. His major premise was that capitalist economies had a pattern of long wave cycles of boom and bust.

    The bust cycle repeated itself approximately every 60 years. If you had read Kondratieff's paper in 1926, you would have known that an economic depression was around the corner.

    Kondratieff identified four distinct phases the economy goes through during each cycle: 1) Inflationary growth, 2) Stagflation, 3) Deflationary growth, and finally 4) Depression—falling prices, falling stock prices, falling profits, debt collapse.

    As the stock market is collapsing, a number of corporate scandals emerge such as Enron, WorldCom, Global Crossing, Adelphia Communications, Arthur Anderson and many others. As the debt load reaches new highs in the economy, the result is a record-breaking number of personal and corporate bankruptcies, as is the case in the US today.

    There are many countries around the world whose economies are in a state of deep economic depression such as Argentina, Bolivia, Colombia, Paraguay, Venezuela, Uruguay, and also most African countries. This is just a small list of countries in deep economic distress.

    We can add to this list of economies in distress, not only the US economy with its $8 trillion dollars of cumulative government debt (and continuing to grow), but also the local economies of most states in the United States. The most important states in the US economy are California and New York, and their economies are in shambles. If California were an independent country, its economy would be collapsing today in the same manner as the Argentinean economy.”
  2. the majority of the people filed all ready. i think the number is 20,000,000 this year on top of like 15MM the prior 2 years, what you arent seeing is that this is a fresh start.

    Stop with the conspiracies, it will drive you insane.
  3. .

    Areyoukidding?: the majority of the people filed all ready. i think the number is 20,000,000 this year on top of like 15MM the prior 2 years, what you arent seeing is that this is a fresh start.

    Stop with the conspiracies, it will drive you insane.


    SouthAmerica: Reply to areyoukidding

    Your number of people filing for bankruptcy is completely incorrect. You are inflating the number by a factor of 10 times the actual figures.

    The new law will not let people get a fresh start and they will have to pay what their incomes are able to handle it.

    It is not a conspiracy. It is common sense.

    I was talking with a friend of mine today and he told me that his monthly heating bill just went up from $ 175 to $ 375 per month.

    A lot of people with variable rate mortgages (and there are a lot people in that group) will receive increases on their monthly mortgage payments, because interest rates will continue to go up in the United States.

    The new law regarding credit cards that will take effect in January 2006, will increase the percentage of minimum payment that people have to make on their outstanding balance on a monthly basis. That will put a squeeze on many people’s monthly budget.

    The wages and salaries of the average American is not going up that much in the US. And when you take in consideration all these factors – they don’t add to a pretty picture.

    Better safe than sorry.

    Ricardo C. Amaral

  4. yeayo


    Yo Ricky, you provide some good insights from time to time but please get with the program and start using the quote button when replying to someone's post.
    It is located on the lower left-hand corner of my reply.
    Looks like:

    Edit/Delete • Quote • Complain

    Give it a shot.
  5. yeayo


  6. maxpi


    Yes but credit card lenders will be free to make loans to even worse risks because they are more assured of collecting so re establishing credit after a default should be easier. Declaring BK is not real smart for most people, if they just do not pay the credit card and ignore the collection guys a lot of it will just never be collected.
  7. Yes,
    It will be VERY bad for the common citzen on his interest only mortage,

    BEst to be rich, and liquid,

    Make the money, because I'm already collecting 5% interest @ no risk, just watch what happens in the future, 7% ? 8% , 15% in 1981

    Rich get richer, poor, they just get by hardly.
  8. .

    October 19, 2005

    SouthAmerica: Why do you think that the Bush administration passed first the New Bankruptcy Law?

    It is called the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”

    But in reality they made a mistake regarding the name of the new bankruptcy act. The actual name should be: “Bankruptcy and Financial Institutions Protection Act of 2005.”

    Screw the consumers!

    The other day in the financial news on television they mentioned that the new minimum monthly payment on credit card balances would be effective for everyone starting in January 2006.

    Credit card companies are increasing minimum payments as a result of new credit card lending guidelines issued by the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision.


    Minimum payment on credit cards is being raised! It is raising from the existing 2% of the outstanding balance to 4%. Is raising minimum payment good news or bad news? It depends on which side of the credit card balance you are sitting. If you are like the 35 million who only pay the minimum... WATCH OUT! Your payment will soon (if not already) double from 2% up to a possible 4% of the balance.

    The new bankruptcy law will be in affect October 17, 2005 and the credit industry is keeping the rise of minimum credit card payments as quiet as possible.

    This is BIG, BIG NEWS! Yet except by accident, have you heard any major announcement about raising minimum payments? Did you see it blaring on the primary news channels? Your credit card payment just doubled. Isn't that newsworthy?. Don't you think this should be shouted from the house top? But instead it is spoken of in whispers... until the new bankruptcy plan is neatly in place. Coincidence? I don't think so.

    Source: About, Inc. - A part of the New York Times Company.


    APRIL 14, 2005
    Business Week
    By Mara Der Hovanesian
    “Tough Love for Debtors”
    Credit-card rules that raise minimum monthly payments could hurt banks and debt-burdened consumers alike

    Like a lot of Americans, Robert and Jill Proctor of Kansas City, Kan., are getting hammered by credit-card debt. When Robert lost his job two years ago, the thirtysomething couple ran up $35,000 on 10 different cards just to pay everyday expenses like groceries and gas. Even after Robert found work last year as a country club manager, their combined income just covers monthly outlays for two cars, a mortgage, and credit-card bills on top of household expenses. Says Robert, who makes minimum payments on the cards with the biggest balances as he struggles to pay off the smaller ones first: "If they tack on more charges, we'll be stuck."

    That's just what's about to happen. Because of a crackdown by the Office of the Comptroller of the Currency (OCC), most banks and credit-card issuers will ratchet up required minimum monthly payments over the next 12 months or so. In the future, the payments must cover all fees and interest and pay down at least some of the outstanding borrowing.

    MINIMUM PAYMENTS. The goal is to help people pay bills faster and slash the interest due. Monthly payments on many cards will double, to about 4% of balances, say card experts. Barbara J. Grunkemeyer, deputy controller for credit risk for the OCC in Washington, explains: "We were concerned that people were making smaller and smaller payments, but not making any headway" in paying off loans.

    The new rules will hit consumers hard, especially on top of higher energy prices, rising interest rates, and record levels of overall household debt, now $10 trillion, or 87% of gross domestic product. American households, on average, possess nearly 8 major bank cards -- or 17, including store and gas cards. Either by choice or necessity, some 19 million households -- about 1 in 6 -- now make minimum payments on their cards, according to card tracking service

    "The main concern is that there could be an increase in defaults and personal bankruptcies," says Michelle Grabow, credit-card research manager at Informa Research Services. That in turn would hit banks' bottom lines as they have to charge off more loan losses. Worse, the shrinking of families' disposable incomes as they step up repayments could put a crimp in consumer spending. The massive indebtedness of Americans is a "huge macro risk factor for the U.S. economy," warns Stephen S. Roach, Morgan Stanley's chief economist. "The debt bomb is ticking."

    ON THE EDGE. Banks were so worried about the potential impact on their businesses that they persuaded the OCC to give them a long transition period before applying the rules, originally published back in January, 2003. Their fears seem justified. Bank of America, one of the first issuers to raise minimums, in the second quarter of 2004, saw net charge-offs for bad loans soar 63%, to $691 million, though by the end of that year only $40 million was related to the increased minimums.

    Bank of America also increased loan-loss reserves by 21.1%, to $170 million. That surprised some analysts because the Charlotte (N.C.) bank had told them that hikes in payments amounted to a modest $10 to $20 per month for most cardholders. Says David A. Hendler, a bank analyst with researcher CreditSights: "It seems that even a small monthly increase in minimum payments can cause some borrowers to tip into default."

    Minimal impact? So far, BofA, Citigroup, Discover Card, and MBNA -- which together issue some 275 million of the 658 million general purpose cards in circulation -- are among those with timetables for raising their minimums. JPMorgan Chase, with roughly 96 million cards, will "experiment" with higher minimums later this year on a "small portion" of its customers, according to Ray Fischer, chief financial officer of JPMorgan Chase Card Services.

    STEPPED-UP PRESSURE. Fischer says 90% of the bank's customers make more than the minimum payments. The New York bank is not sure just what the financial impact will be. Still, it reported in a recent filing that it, too, is bracing for more delinquencies and charge-offs.

    Some issuers continue to insist that the impact will be small. At Wilmington (Del.)-based MBNA, new cardholders will have to pay higher minimums starting in July. Existing customers will receive notices in September and see changes soon after. They'll have to pay interest and late fees, if they have them, plus 1% of the remaining balance. Currently, MBNA customers have to pay interest and fees plus $15, or 2.25% of new balances, whichever is less. MBNA spokesman James Donahue says the change "won't have a practical impact" since most cardholders make the minimums.

    That doesn't mean MBNA and others won't be stung by the extra vigilance of the OCC. It has also warned banks that they must consider substantially reducing interest rates -- which quickly jump from introductory offers of 0% to an average of 16%, according to -- or eliminating fees so that more of cardholders' monthly payments go to cutting their balances. Banks haven't been "overly keen about the prospect, but we needed to keep the pressure on," says the OCC's Grunkemeyer.

    TOOTHLESS IN CALIFORNIA. No wonder. Last year, credit-card issuers reported record profits of $30 billion -- much of it earned on liberal lending policies and punishing fees that often exacerbate the financial woes of cardholders who have gotten in over their heads. Borrowers who make a late payment -- whether it's for the phone bill, a credit card, or a house payment -- often are charged punitive rates averaging 29% on all their cards. These on-the-edge borrowers are the most profitable part of any bank's card operations, as long as they don't default.

    To make matters worse for banks, consumer groups and legislators are pressing them hard to disclose more on monthly card statements about minimums and fees. Senator Chris Dodd (D-Conn.) reintroduced the Credit Card Accountability Responsibility & Disclosure Act in March, after a stalemate in 2004. The bill seeks, in part, to force credit-card companies to say how long it would take to pay off outstanding balances if customers just pay minimums, and how much interest they would pay over the life of the loan.

    California enacted a similar law three years ago, but "it's not being enforced," laments Tom Dresslar, spokesman for State Attorney General Bill Lockyer, because the banks argue that federal rules preempt the state law.

    180-DAY WINDOW. If customers saw exactly how much credit was costing, they might be more inclined to pay higher monthly amounts voluntarily. Consider a customer who has a $10,000 balance with a 16% interest rate, and who makes a 2% minimum monthly payment. It will take more than 40 years to pay off the balance and cost $19,329 in interest. With a 4% minimum, the loan is paid in about 14 years, and interest costs are $4,931.

    The full impact of the OCC rules depends on whether customers can pay the new minimums. What is certain is that once banks implement the changes, they have 180 days to charge off any bad loans that result. "The hope is that there'll be only a temporary increase as you push those customers over the edge and they default," says David L. Fanger, a banking and finance analyst with Moody's Investors Service. If so, that would be a big relief for banks, strapped American consumers, and the U.S. economy.


    Mara Der Hovanesian is Finance & Banking editor for BusinessWeek in New York

  9. 'The rich get richer, the poor become grist for the mill"
  10. you guys will be eating grist this if you dont stop shorting it. This market is strong.

    What about globalization 2 Billion people wanting consumer goods. think about it not your own self.
    #10     Oct 19, 2005