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Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Anyone (Dag?) have any details on this? It was passed and became a law earlier in the year. I just heard about it from my very freaked out mother, who believes that all her credit card payments are going to automatically double and force her into bankruptcy.
From what I've read, it won't automatically double everyone's payments, but parts of it are designed to force people to pay more of the principle of their credit card debt, so they pay less in interest over the life of that debt, and so they pay it off faster.
It's a good idea in spirit, but what do the people who are struggling to pay their minimums do?
Posts: 21898 | Registered: Nov 2004
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I had read something about this in the paper a while back. The idea is that many credit card companies put the minimum balance at such a point that if you only pay the minimum every month you will NEVER pay off the debt (even without any other purchases on the card). The law is supposed to require the minimums to be high enough that they pay off more than just the interest for that billing cycle.
It basically forces people to be more responsible with their credit, with the downside of having to pay more in the shortterm if you were only paying the minimums.
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Couple this with the new legislation that makes credit card debt something that bankruptcy doesn't clear you of and we're seeing the recipe of a disaster.
In theory, the higher minimums will pay off debts faster, but there are so many people struggling to make the minimum payments as it is.
What will come of this? I'm not sure of anything except that if there's a way to squeeze blood from a turnip, the credit card companies will find a way to do it.
Posts: 2848 | Registered: Feb 2003
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quote: What will come of this? I'm not sure of anything except that if there's a way to squeeze blood from a turnip, the credit card companies will find a way to do it.
I sincerely doubt that this was the credit card companies' idea. This whole plan means that they make less money. Why would they want that?
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My understanding is that it is not the bankruptcy reform act requiring the higher minimums; rather, it is a crackdown on banks and thrifts that lend money via credit cards.
quote:This news -- that an increasing number of people can't handle their credit card debt -- is more evidence that cardholders should be forced for their own good to pay more of their balances every month. And they will, as a result of an edict from the federal agencies that govern the banks and thrifts that issue credit cards.
I wrote about this issue recently, arguing that it was about time federal regulators ordered credit card issuers to increase the minimum monthly payments consumers have to make.
The regulators want the institutions to require that cardholders cover at least 1 percent of their outstanding balance each month. This is in addition to any finance charges or fees owed.
The 1% minimum means that a balance would be paid off in 100 months, or a little more than 8 years, if no new charges are made.
Here's the underlying motivation: These banks and thrifts have federally backed insurance. If the banks go under because of excessive credit card default, the depositors lose their savings. Federal insurance guards against this, having two principle effects:
1.) Preventing a run on the banks when rumors circulate that a bank is failing. Runs on banks are a feedback loop that pretty much guarantee a bank will fail.
2.) Reducing the risk that the banks or thrifts will fail by eliminating loans too risky for the insurance system to handle.
quote:Payment-option mortgages typically carry 30-year terms, but allow up to five years of reduced rates as one of several optional payment plans. The other two options allow interest-only monthly payments or fully amortizing payments including principal reduction. About 70 percent of borrowers choose the minimum payment option, according to mortgage securities research.
When a buyer pays the minimum rate, the loan balance increases rather than decreases. A $400,000 original loan balance might balloon into a debt of $440,000, for example. The deferred principal and interest payments get tacked onto the homeowner's total debt on the mortgage, a process known as negative amortization.
Though many lenders restrict the total amount of negative amortization to 15 percent above the starting balance, federal regulators worry that tens of thousands of borrowers may be accumulating heavy debt loads on houses with the expectation that double-digit appreciation will bail them out.
But Dugan warned, "If real estate prices decline -- and there already is evidence of softening in some markets -- these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties."
Payment-option plans have another major worrisome aspect, in Dugan's view: "payment shocks" of 50 percent to 100 percent looming just over the horizon. For example, a $360,000 payment-option loan with an underlying rate of 6 percent and a five-year payment-reset deadline would push a borrower's monthly payments up by 50 percent in year six, even assuming no increase in market rates, Dugan said. "If rates rise to just 8 percent, the payment increase when amortization (principal reduction) begins would [be] nearly double."
Financial regulators worry that thousands of borrowers might not be able to handle the abruptly higher mortgage payouts and would be forced to sell or default.
"Is this an appropriate product to mass-market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a large mortgage?" Dugan said.
His clear implication was no -- a conclusion with huge potential significance for the real estate market. Dugan's office heads the Treasury Department's main regulatory oversight unit for national banks and their mortgage subsidiaries. If it directs banks and mortgage companies to stop making negative-amortization loans or sharply cut back on them -- as it did several years ago with negative-amortization plans for credit card accounts -- banks nationwide could shut off the spigots for such loans.
The bankruptcy refor act is not directly related, although of course they will all affect each other.
Note that the most onerous restrictions on the bankruptcy reform act - those aimed at limiting access to Chapter 7 - are triggered in bankruptcies caused by consumer debt. Much of the rest is aimed at known loopholes: forum shopping, hiding assets in houses or trusts, and the like.
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