Close To The Line, Personal Debt In America

American individual debt now exceeds $10 Trillion ($10,000,000,000,000). In comparison, the National debt is "only" $7.7 trillion. Put another way, a baby born today would inherit $26,000 in debt from the government and another $66,000 in debt from his/her parents. The Federal Government has shown no interest in regulating the National debt, but has moved on the consumer front with the new Bankruptcy Law and the little known requirement for increased minimum payments on credit cards.

How did we, the American consumer, get here? We possess multiple bank credit cards, more store and gas cards, and we use them. However, more and more, it is not the impulse buys that lead to crushing debt, but the necessities. The loss of even one income for a short time turns into a spiral toward bankruptcy. First gas we find ourselves charging all our gas, then food, then a cash advance to meet the car payment, and then the unexpected medical emergency. The fastest growing group of Americans filing bankruptcy is the elderly. Almost all of them cite medical bills as the reason for bankruptcy. The younger are no better off. Most either have seen their medical coverage decreased by companies seeking cost cuts, have no coverage because they are not full time employees, have lost their medical coverage from a layoff, or, worst of all, gambled that they wouldn't get sick because they couldn't afford coverage. The casualties - 1 million filed bankruptcy last year and nearly 20% of the others in debt could make only the minimum payment on their cards.

The Comptroller of the Currency has taken aim at those who make minimum payments with a ruling that in effect will raise minimum payments to somewhere between 2 and 4 per cent of the remaining balance. The rationale is by forcing debtors to pay more it will save them interest cost by shortening the payoff time. This ruling was actually made in 2003 but even the banks fought its implementation. Before you think the banks are on your side remember the less the balance carried over the less interest they make. However, their argument that this would force more people into bankruptcy proved true. Bank of America said that $40 million in write-offs last year were directly caused by forcing their card holders to pay a larger minimum. The dollar figure is scary but what is scarier is the fact that an increase in credit card payments of only 20 dollars on average forced so many bankruptcies. The richest country in the world has millions of middle class families living so close to the line that an increase of $20 a month in payments on credit cards causes them to give up and file bankruptcy. Many more that continue the struggle to meet the new requirements will find themselves trapped into late fees as they miss payments and with the missed payments will come even higher interest rates.

As these families finally seek protection in bankruptcy they will find the rules have changed. The debate on the real impact is still being argued by politicians, banks, and consumer protection advocates. All agree it will make it harder for individuals to file for Chapter 7 bankruptcy protection. The "Bankruptcy Abuse Prevention and Consumer Protection Act" makes it harder to file a Chapter 7 bankruptcy through a means test that severely limits the bankruptcy judge in using discretion in approving a Chapter 7 filing. If your income is above the state median and you "can afford" to pay 25% of your unsecured debt you can not file Chapter 7 bankruptcy. More debtors will be put in Chapter 13 bankruptcy where they will face another means test based on IRS standards of what you should pay for food and other expenses. In other words the bankruptcy judge must base the repayment plan on what the IRS says you should have available, not what you actually have available for debt repayment. Another requirement is that the debtor must seek debt counseling before the hearing. Although seen as just another unnecessary step by detractors, this may in fact prove to be the best alternative for those that can not qualify under the new rules for Chapter 7 bankruptcy.