Industry News

Originally published April 25, 2005
Originator Times

What Does The New Bankruptcy Law Mean To Your Business?

By Gerri Detweiler

President Bush has signed into law a new bankruptcy bill that will make it harder for many debtors to get a fresh start. In a nutshell, the bill is designed to subject debtors who have earned more than the median income in their state to a “means test” under which, if they can pay back at least $100 a month toward their bills, will be forced into a restrictive five-year-long Chapter 13 plan.

But also included in the massive bill are changes that are likely to mean major changes for all consumers in distress. As Harvard Law Professor and bankruptcy researcher Elizabeth Warren says on her bankruptcy blog, “The means test will require EVERYONE who files bankruptcy--regardless of income--to file new forms, detailed budgets, tax returns and new affidavits… In some places, the means test bites above-median and below-median debtors differently, but it bites everyone.”

What does this legislation mean for you, the loan officer? Here are my predictions:

1. The financial services industry, left unchecked, is likely to get more aggressive in its marketing and pricing practices. Already credit cards can go up to 22% or more even for a consumer who has never been late on a payment. It is likely to get worse when they know fewer consumers can file. This means homeowners with very high interest rates on credit cards and other personal loans will look for mortgage loans that can help them consolidate those debts at lower rates and payments. Keep in mind, though, that these consumers’ credit scores are likely to be hurt by the fact that they are maxxed out, and therefore they may fall into the subprime category until they are able to get back on track financially.
2. Families where both spouses work, small business owners, and higher income professionals will more often be forced into a very restrictive five-year plan (even if they have recently suffered a job loss or lay-off) and be denied a fresh start. Tapping home equity may be one of the only options they have. For consumers who have already used most of their available equity, however, things may be bleak.
3. Bankruptcy attorneys will be swamped until October when the new law goes into effect. After that, some very competent, experienced, consumer bankruptcy attorneys will decide enough is enough and get out of the business altogether. If you work with bankruptcy attorneys to help their clients who have filed in the past get a loan, understand the pressure they may be under for the next several months! Also, understand, though, that all those people who are filing between now and October need and want your information about how they can rebuild their credit, and buy or refinance a home after bankruptcy. Add that to the several million who have filed in the last several years and you can see how this can be a great niche to work with.
4. Credit counseling agencies will become very busy after October when debtors will be required to demonstrate they have taken an educational course through a non-profit counseling organization before they can file. If you work with credit-challenged homeowners, you may want to talk with your local counseling agency to see how you might be able to help in this process by helping homeowners understand when it may make sense to refinance their home as part of their overall debt-reduction strategy.

More than ever, consumers need reliable information to help them find a way out of credit card and financial problems. If you can help them do that, and they know you are the credit specialist, you can be as busy as you want to be!