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Perfect Storm: New Debtors Prison

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by Hale Andrew Antico, Esq.

In the old days, centuries ago, if you could not pay your debt, you were locked up in  jail.  You were not to be released from your prison sentence until you could pay your debt. Needless to say, this was a debt trap that no one ever got out of.  Thankfully, this form of incarceration is now outlawed.

There are many recent developments in the past few months that signal the return to a modern version of Debtor's Prison.  Let's see if we can spot a trend:

1.  Credit card companies are doubling the minimum payments that they will accept from their customers.    The bar is rising.  If you are paying interest only -- effectively just treading water -- the water level is about to go higher.  On maybe one card, you can handle the difference between $50 and $100 a month.  However, most people have numerous cards, so the minimum amount just to keep your current amount of debt will soon double each month.  Of course, this is not reducing your debt, just maintaining it... indefinitely.

2.  At the same time, because of zero-precent interest to lure new cardholders, credit card applications are at an all-time high .   More and more applications are being sent out, many not even requested.  How often do you get an offer in the mail for a new, pre-approved credit card you did not request?  This is happening more often, at a record pace.

3.  In many parts of the world, credit card delinquincies are also at an all-time record high .   While minimum payment requirements are getting higher, and people getting applications are at a record, people falling behind on their credit cards is higher than it's ever been.

With this kind of trend, you'd think that people will need debt relief now more than ever before.  And you're right.  People are filing bankruptcy at record rates in the U.S.   Granted, a lot of this is because the new harsher bankruptcy laws are taking effect in October.  But this all-time pace of bankruptcies (or "insolvencies" in the UK) can't be explained by US developments alone because a cross the pond, British people are filing for bankruptcy in record numbers. And there are many, including the author, who believe that after October, bankruptcy filing may be more difficult and more expensive. Required financial counseling, higher duty for the attorney to double-check all the facts the client presents and other factors require more work.  This could raise the price of a bankruptcy in the years ahead.

So, just when a perfect storm is brewing to require more credit card help for the average Joe than ever before, debt help will be harder to get, and more expensive. More expensive to the person who has little or no extra money each month.  Meaning that lawsuits against consumers and judgments (leading to wage garnishments) will increase.  Bankruptcy won't be as available to end the pain.   

And people will be  in a new 21st-century version of the Debtors ' Prison.



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