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Consumer Bankruptcy on the Rise

The Debt Free League is blaming poor credit counseling consolidation plans for the continuing rise in consumer bankruptcy.  On the flip-side, the league calls “debt settlement” the best alternative to bankruptcy as it reduces debts, principal balance, interest rates and fees.  In the meantime, according to the American Bankruptcy Institute, bankruptcy filings may reach 1.6 million in 2010.

Filing for bankruptcy has become more popular than ever.  Last year, the National Bankruptcy Research Center reports consumer bankruptcies reached 1.41 million—a 32% jump from ’08 and incidentally, the highest level for consumer bankruptcies since three years prior, in ’05.  Businesses filing for bankruptcy also jumped 16% from ’08-’09.

Five years ago, the Federal bankruptcy law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA), was introduced to reduce bankruptcy in the US.  For this law to be adopted, the banking industry, according to the New York Times, invested $100 million in lobbying for BAPCPA.

The Debt Free League’s Vice President, Eric Santacruz said, “The nation’s increased bankruptcies have produced an oddball effect for credit card companies, which hoped BAPCPA would make it harder for many individuals to get protection from creditors…Participation in a debt settlement program creates an opportunity for consumers to avoid bankruptcy and still reduce up to 60% of their total debt.”

2008 brought with it a deep recession chock-full of foreclosures left and right and high rates of unemployment.  And soon, banks and credit card companies would lose trillions and trillions—the same banks which once paid $100 million to lobby for BAPCPA.  Today, the number of jobs offered is still slim and neither foreclosures nor bankruptcy filings have slowed.

Banks these days refer people to credit counselors.  The banks like non-profit credit counseling agencies—an agency’s debt consolidation strategies, more often than not, enables the bank full financial recovery of all debt while the credit counselors receive fees/money from the banks for collecting the debt.  With only a 21% completion rate, debt consolidation plans really may not be the way to go.

The Debt Free League says credit counseling may not work as reducing rates is typically not enough to avoid filing for bankruptcy.  The league presently offers a debt settlement program known as the Debt-to-Freedom Plan which works closely with creditors in achieving a lower settlement amount on debts.