Houston Lawyer Blog

Many of the credit card companies are saying that the amount of consumer debt has decreased in recent months. Consumers are paying more than they are borrowing for the first time in a long time. In addition, recent reports state the number of consumer bankruptcies is down 18 percent since July. Are consumers finally getting tired of debt? Are we finally coming out of the country's deep recession?

The jury is still out on that front. One reason for decreased debt suggests that many Americans have defaulted on their credit cards and other consumer debt. Others state the lowered amount of bankruptcies is merely a result of the changes to bankruptcy laws, making it harder to file in the first place.

In any event, consumers need to fight their debt battles with smart spending strategies and better budgeting. Consumers need to realize that that new cardigan is not really worth it if you pay 29 percent interest. Ask yourself how much that cardigan is really costing you by the time you pay it off? You should always know your interest rates on your credit cards and other lines of credit. If you don't, then the cardigan could cost as much an IPAD by the time you pay it off.

Here are some simple tips to free yourself of debt:

1. Make a budget based on your monthly income and expenses.

2. Find out the interest rates on all your debt.

3. Work on paying down the higher interest debt first. Pay more on the higher interest debt than the lower interest debt, as your budget allows of course. There is no sense in paying anything more than the minimum payments on low or zero interest rate debt. If you are lucky enough to have low interest debt, you want to maximize that benefit as long as possible.

4. Make a timeline for when you want to get out of debt. Studies show that people who give themselves deadlines get much better results.

5. Separate the need purchases from the want purchases. By cutting down spending, you can devote more funds to your higher interest debt.

6. Do not use credit cards to survive! If your budget will not sustain your current standard of living, then do not compensate by using credit cards. Instead, adjust your budget to meet your current means. If necessary, cut up all your credit cards if you feel inclined to use them when you know you shouldn't. It wont cancel the card, but at least it will make it more difficult to use. (TIP: Do NOT cancel open revolving accounts, such as credit cards. Cancelling your open revolving credit will hurt your credit scores! Open revolving accounts are some the best things you can have on your credit report; try to have at least one open at all times.)

By changing your attitude towards debt and consumer spending, you can really make a huge impact in your overall life. You will find that you can spend the same amount of money but have more money in your pocket at the end of the day. Hopefully, by following these tips you will be one of the lucky people to be debt free.

Whoever said change is good was not referring to recent bankruptcy reform. On October 17, 2005, Congress instituted federal bankruptcy changes that were supposed to eliminate the "deadbeats" filing bankruptcy. The changes were designed to make it more difficult for those consumers trying to run from debt through bankruptcy.

Under the changes, the new first step is to undergo credit counseling. The counseling step is designed to analyze debt to income ratio and the ability to pay debt. The system is designed to determine which people could be steered into a debt management plan and away from bankruptcy. Moreover, this step is designed to deter abuse of the bankruptcy system. However, a study by the National Association of Consumer Bankruptcy Attorneys (NACBA) concluded that 97 percent of consumers were unable to repay any debt. More surprisingly, 79 percent of consumers were put into "dire financial straits by circumstances beyond their control, such as the loss of a job, catastrophic medical expenses or the death of a spouse."

Once a consumer concludes credit counseling, consumers face even more hurdles in determining which specific chapter to file. The two types of consumer bankruptcy chapters are 7 and 13. Chapter 7 provides the debtor a discharge of his or her debts via a liquidation of assets. In Chapter 13, the debtor receives a discharge through payment into a reorganization plan. Here, the debtor pays a monthly amount into a plan that cures overdue debts. In the past, Chapter 13 was not widely used as Chapter 7 provided a discharge without any obligation to pay debt. In addition, most people protected their most prized possessions through federal or state bankruptcy exemptions.

However, new hurdles like the "means" test has affected the eligibility of many would-be Chapter 7 filers. Now after the reform, debtors must pass what is known as the "means" test in order to file Chapter 7. A debtor is forced into Chapter 13 when he or she fails the "means test." The "means" test states that if the prospective filer's current monthly income (CMI) multiplied by 12 exceeds the median income for a family of the same size in the same state, then the debtor is forced to file Chapter 13 bankruptcy. This provision was designed to limit the number of people abusing the system. In reality, it creates a presumption of abuse. As a result, consumers are now given limited freedom in choosing which bankruptcy chapter to file.

The legislature did not leave out Chapter 13 in terms of change. It also endured an overhaul. For instance, the length of repayment plans is now five years. Also, unsecured creditors are now treated more favorably under bankruptcy laws. As such, Chapter 13 plans will not be approved if they provide less to unsecured creditors than if the debtor liquidated his or her assets in Chapter 7. As a result, some consumers might not be able to file bankruptcy at all.

Continue reading "Bankruptcy Reform: Fighting the Uphill Battle" »