Date Added: Sept. 2, 2005
Credit cards have become widely accepted and are responsible for a large portion of all consumer spending. Nearly half of credit card holders pay off their entire balances each month, but many consumers maintain what the industry calls 'revolving credit.' They carry a balance on which interest is charged. Understandably, lenders prefer the latter and devised a system of minimum payment amounts that would ensure customers would be carrying balances for a long time. A new law will make it harder for consumers to revolve their credit, presumably to protect the consumer, but many are concerned the change will do more harm than good.
2005 ... The year of the Black Christmas?
Millions of Americans are going to have a huge surprise before Christmas ... a big enough surprise to have them make a huge cut back in Christmas spending.
The event will surprise you ... it is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
If your first thought is that it will not apply to you, and only to those who are involved in bankruptcy conditions ... think again.
The new law has hidden provisions that will effect every American with a credit card who has been making the minimum payment amount in the past. This provision, by law, will have the banks change the minimum current payment of 2% of the balance to 4% ... changing the pay off period from 20 years to 10 years.
When consumers get their 100% increase required minimum payment in November’s statement, available discretionary income will be sucked out of retail purchases and into the banks.
This new change in minimum required payments will drain a minimum of 13 Billion Dollars of Christmas shopping purchases. The real number is likely to be at least double that amount ... 26 Billion dollars.
The effect on retail store profits, the stock market and the economy will be a very negative event.
Information about Americans with Credit Cards ...
Currently, 92% of Americans carry 5 to 6 credit cards in their wallets, and 55% have 7 to 8 cards in their wallet.
About 20% of credit card users are “maxed out” and cannot charge more. These consumers, with no money will be forced to make double payments. This has to be some new form of banking insanity, as this will certainly force many of these consumers into bankruptcy ... but only after October 17th. when the new bankruptcy law doesn’t allow them to erase the charge card debt ... and requires them to pay it off during their lifetime. This will have a long term negative effect on the economy.
For banks, it requires them to keep the amounts due on the books because technically it has to be paid, as guaranteed to the banks by the new law. This will create fictitious balance sheets for banks that make assets look wonderful when the likelihood of them actually receiving the payments are small.
Currently, the average credit card debt per person is estimated at $8,652. A minimum 2% payment used to be $432.60 ... the new minimum payment will be $865.20. This happens just in time to create a Black Christmas for retailers.
I spoke to one subscriber who told me, its okay for everyone in my State of Massachusetts because all our homes are protected under the Homestead Act for $500,000 of assets.
Wrong again ... Last April 21st. The new law quietly changed that. Homestead exemptions are now capped at $125,000, regardless of what the law of your state is, unless you've resided in that state for at least 40 months.
What about someone’s car if they might be filing for Bankruptcy after October 17th.? The new Chapter 13 law requires one to pay the full loan amount ... not the current value of the car if you want to keep the car. This will apply to loans less than two and a half years old as of the date of filing. Similar new rules apply to any other property classified purchases within the last year prior to filing.
Some folks I have talked to said, "that anyone filing bankruptcy is a bum and deserves everything they get!".
But, here are the facts ...
Most filing bankruptcy are not trying to cheat the system. The average person filing earns a little over $22,000 per year and the majority had a long period of unemployment before filing for bankruptcy. Consumer's Union reported that 85% of the elderly had medical or employment reasons for the bankruptcy. Single, divorced mothers with children struggling to survive make up a large percentage of bankruptcies.
This revision is similiar to Sarbanes-Oxley it is over done and it will need to be revised. But in the meanwhile it has teeth.
Anybody who has ever been through credit counseling or even just lectured by a relative should know that paying the minimum amount due on our monthly credit card statements is not necessarily a good idea. Consumer advocates have been warning against the practice for years, but many consumers have not been listening. So advocates turned to the government for help in saving people from themselves. The result: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which tightens requirements to file bankruptcy and prevents lenders from employing practices that allow consumers to get into a never-ending loop of revolving debt.
While the text above is basically true and accurate, it is a simplification. The increase was actually encouraged by the Office of the Comptroller of the Currency and was supported by the BAPCPA, but not mandated by the law. It is also not accurate to say that minimum payments will double, as the current minimum payment charged by your lender can vary within established ranges and many consumers' minimums are already more than 2 percent of their balance. Further, the increase in minimums encouraged by the Comptroller and supported by the BAPCPA of 2005 is not a set percent, but a guideline aimed at reducing the overall time required to pay off the total debt. For some consumers, the increase will be less than 100 percent, for others, it could be more.
Since this change was in motion by several institutions before the BAPCPA was passed, it's also not fair to call this a 'secret provision.' The change has been publicized, though it has often languished in the shadows of the BAPCPA's larger and more sweeping changes to how American consumers will for file bankruptcy.
Further, not every lender is required to raise their minimums under current laws and rules. Three national lenders (MBNA, Citibank, and Bank of America), have already annouced increased minimums, with others sure to follow. But, keep in mind, this is not some money making scheme to milk that extra penny out of the consumer. Rather, the lending industry stands to lose a lot, both in terms of defaulted balances and reduced interest revenue over time (Bank of America has estimated that they will lose as much as $130 million dollars in the first year), thus some lenders may be hesitant to do this unless they have to.
A recent survey for the American Bankers association found that only 4 percent of credit card customers pay the minimum amount due on a regular basis. Of course, with the increase, many of these folks will find it very difficult to make ends meet if they were already struggling to meet the minimums. With the tougher bankruptcy laws, most will have few options other than seek credit counseling and making special arrangements with their lenders.
People who have been voluntarily paying a little more than the minimums will suddenly become the ones paying the minimums, though they will certainly be better off than the minimum-payers of the past, and will find it much easier to control or eliminate their debt. A higher minimum means you will pay your balance off earlier and accrue less interest. According to BankRate.com, it currently would take up to 22 years to pay off a debt of just $1,000 if the consumer only pays the minimum payments. The new law shaves a full decade off that timeline and reduces the total amount of interest on the loan significantly.
The BAPCPA does require lending institutions to print on your monthly statement exactly what paying only the minimum means (in terms of how long it will take to pay off the balance and how much interest you'd pay over that time).
The text above originated as the Wednesday, August 31, 2005, edition of StockTiming.com's Daily Stock Market Report newsletter. It was written by Marty Chenard, an advanced stock market technical analyst, and offered in the context of explaining a possible cause of what the author feels is a burgeoning drop in the Dow Jones Industrial.
The introductory paragraph missing from the above:
Part 2: Yesterday, I covered the Dow Jones Industrials and the sizeable drop that it could see within the next 6 to 9 months. In today's commentary below, I address an important event that dramatically increases the odds of such an occurrence unless Congress and our politicians change things soon.
The last line of the circulating text (referring to Sarbanes-Oxley, a landmark 2002 corporate reform law enacted in the wake of financial scandals at Enron Corp. and WorldCom Inc.) is not part of Chenard's original and replaces this original closer:
What ever happened to our “Kinder, Gentler Nation”? Whatever happened to empathy and helping those who are truly in need. We spend Billions of dollars in government give aways to other countries and neglect our own people at home. This is indeed a sad loss of compassion for this country.
The references below provide many interesting and enlightening insights into the implications of the new law. As confusion mounts around this changw, BreakTheChain.org emphasizes the importance of ensuring that the sources for the information we share are reliable. E-mail chain letters rarely are. If you can't trace something to its source, don't pass it on. As we've already seen with this one, well-meaning forwarders are free to pick and choose how much of a piece they share.
References: StockTiming.com (August 31, 2005), BankRate.com (1), BankRate.com (2), HowStuffWorks.com, New Hampshire Union Leader, Longmont Daily Times-Call