New bankruptcy rules in the U.S. are working - but America is still in love with debt

When U.S. President George W. Bush signed the Bankruptcy Abuse Protection and Consumer Protection Act in April 2005, there was a lot of debate about who would benefit most from the tough new laws - lenders or borrowers. Consumer advocacy groups complained that the bill, which makes it harder for Americans in dire financial straits to seek protection from their creditors, was nothing more than a gift to major credit card companies and other large lenders looking to trap already-strapped borrowers in unrealistic repayment plans. The lenders, in turn, argued that the bill was necessary to curb widespread credit abuse by debt-riddled Americans.

While the debate still rages, one thing has become clear: the new bankruptcy laws are doing exactly what they were designed to do. Statistics released one year after the new rules took effect showed that bankruptcy filings in the U.S. had dropped to a 10-year low. In fact, for the 2006 fiscal year, personal bankruptcies had fallen 38 percent from the previous year and corporate bankruptcies had fallen 20 percent.

Despite this, Americans are still piling up huge amounts of personal debt - in 2005, the national savings rate actually fell into negative territory, something that hadn't happened since the Great Depression. Apparently, we love to spend, spend, spend - and many analysts have warned that the U.S. middle class is headed for a bankruptcy crisis.

Causes of bankruptcy

America's love affair with credit only partly explains why the number of bankruptcies spiked to an all-time high of 1.7 million in the year prior to Bush signing the new law. A relatively strong economy has driven up salaries in real-dollar terms, which in theory could cover our spendthrift mentality if that were the only major expense on our budgets. Unfortunately, it's not. People usually careen toward bankruptcy when their spending-on-credit mentality is suddenly coupled with some other huge financial event. These include:

  • A job loss. So many of us operate on *tightly-wound budgets [Wiggle Room]that presuppose a reliable source of income. Alas, this is not always the case.
  • A significant illness or injury. Currently, 48 million Americans are without any form of health insurance, which can spell financial disaster should they require major surgery or a prolonged visit in hospital.
  • A divorce. If you thought the wedding was expensive, wait until you have to split with your partner - which can involve huge legal fees, loss of assets, unpaid leave from work and a whole host of other expenses. Not to mention you have to get used to living off one income again.

The advantages and disadvantages of filing

While declaring bankruptcy will put you in the financial doghouse for up to 10 years, the news isn't all bad. Filing for bankruptcy will halt most of the collection activity against you and usually will not result in the loss of all of your property (though rules vary from state to state). There are also ways of repairing your credit in a hurry once you have declared bankruptcy.

The biggest advantage most people cite is that declaring bankruptcy was the drastic and sobering event they needed in order to change their relationship with money. The best advice is not to ignore the warning signs that tell you it's time to file. And while you can file on your own, without help, it's never a good idea. Always work through a bankruptcy attorney, who can help get you the best arrangement for your post-bankruptcy world.

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