My favorite topic- bankruptcy reform

As you might have noticed, I have been very critical of the overhaul (I mean cash giveaway ) of the bankruptcy laws that just passed both houses of Congress. Don't get me wrong, some reform is probably due, but lets not forgot that the bankruptcy process is not automatic, a judge presides over it and ultimately determines what debts you are allowed to discharge or if you need to pay them back. I am sure there has been some abuse of the system but probably not enough to warrant the overhaul of this magnitude.

I think calling this bankruptcy reform is not correct. It should be called the credit card and finanical service industry cash giveaway, kind of like the lottery, except this will pay off more often. This whole thing is a vicious circle started and in many cases, orchestrated by the credit card companies themselves. Now I don't think someone should be able to just charge up a fortune and then declare bankruptcy because they don't want to pay their bills. That is what the finance industry wants you to believe happens with most people that declare bankruptcy but that is not the case. I thought I remembered reading somewhere that about half of the bankruptcy filings out there are becuase of medical bills.

I might feel differently about this issue if the credit card companies were not at least partly to blame for this mess. They extend too much credit too easlily to people who should either not have it or not have that much. They start even in college before you are working. Then once you are deep in the hole the fun starts. Now again, the credit card companies are not holding a gun to anyone's head telling them to charge but they are responsible for issuing credit responsibly which they have not done.

For people on the ropes with lots of debt, the credit card companies to a great deal to put them further in the hole. If you are late by even one day, you get hit with a late charge of up to $40. Doesn't matter if you mailed a week earlier, if its not one time, its late and you get charged. Then if you are late, not just to them but to anyone that they can find out from, they jack your rate up to the penalty rate which is usually at least 22%, sometimes as high as 29%. If you have someone that is in financial trouble, and they jack your rate way up, not only will you pay more, but your balance will drop less even though you are paying more. Now its even harder to pay, basically they are pushing you to bankruptcy but now that you are there, they want you to have to pay up, even though they should bear part of the blame for getting you there. Now again, its not all their fault, but as you can see from the steps above, if someone is on the ropes financially, these companies make it hard to catch up. In the above situation, if that person is close to their limit and then go over because of the extra finance charges, boom, a $39 late fee.

The credit card companies (and other financial companies) have been lobbying for this reform for about a decade and they have spend a massive amount of money on this effort. In this case it looks like they got what they paid for didn't they?

Watch over the next year or two, I predict even though the change in bankruptch rules should help these companies financially, they will not lower credit card rates at all, even though they should because they have less risk now. So when they borrow at prime rate, currently 5.75 % and they jack someone's credit card rate up for being two days late one time on their car payment, how can you not call it a cash grab? That is a spread in that case of nearly 20%, pretty healthy, I can see why Congress needed to bail them out. My prediction is that you will see record or near record earnings from credit card companies in the next 18 months to 2 years as a result of this, but just remember its not about money, its just to stop abuse. Did they man by borrowers or lenders, becuase the lender abuse will continue.