If the idea of declaring bankruptcy has been on your mind recently, the time to act is now. The new bankruptcy law, signed by President Bush in April, is set to take effect in October of this year. The law makes it much more difficult, if not impossible, for people with unmanageable debts to get a fresh financial start in life. Furthermore, the law is slated to take effect just as new credit card policies doubling average monthly minimum payments is set to take effect. If your payments are just barely manageable now, they will soon be unmanageable, just as the bankruptcy window slams shut.

Take heed of the situation that is unfolding, and act accordingly.

The Dilemma

Like many others I know, my friend K has credit card debt that is overwhelming. Her monthly expenses for food, housing, and transportation plus credit card payments are just about equal to her monthly salary. She has absolutely no leeway. Any unexpected expenditures can (and regularly do) put her over the edge. Some months, she ends up charging her groceries and other expenses, putting her further into debt. K is no sloth, either. She has a regular day job and a part time job cleaning houses to help make ends meet. Even so, she is falling behind financially. She has no savings to speak of, and her life is consumed with work and money worries, of how or if she will ever be able to get ahead. At $500, her monthly credit card minimums are the second largest expense on her balance sheet, after housing. Even so, with the high rates that she is paying, about $475 ends up going to the bank for interest, with only $25 going to paying off principal! This is scandalous, and at another point in American history, it would have been called usury. Today it is simply called business, American style.

The way things are going, she knows her credit card balances will never be paid off.

Apparently, the banks have realized this too, because they are raising monthly minimum payments right around October, (conveniently) just as the new, tougher bankruptcy laws go into effect. According to this article in the Houston Chronicle, and this article at About.com minimum payments could double, from 2% of principle to 4%. This would mean that my friend K would suddenly have a $1,000 minimum payment to make each month!

And K is not alone. Both she and I know many others in the same situation, and you probably do as well. On the outside, everything looks fine: They live in nice houses, drive nice cars, eat out at fine restaurants, but their personal balance sheets are disasters. Their entire lifestyle is financed by debt, and that debt load is becoming unmanageable. Like K, when minimum monthly payments double, it will be impossible.

I told K what I tell everyone in this situation: Declare bankruptcy, and quick. The laws are changing, and time is running out. After October, not only will it be harder to do, it will be more expensive and fewer lawyers will be doing it. According to this article from the Missoulian, the new law is simply too cumbersome to make it worthwhile for lawyers. So if you think you can wait and have your debts wiped clear in the future, forget about it. Instead of declaring Chapter 7, you'll likely be forced to declare Chapter 11 and repay your debts over an extended period, living for the next 5 - 7 years paycheck to paycheck, like an indentured servant to the banks.

The deadline is October 2005 to avoid such a fate.

Just Do It!

Many people like my friend K delay taking action on bankruptcy because they feel a sense of dread, shame and fear of the unknown. They fear repercussions from lenders, fear that they may never be able to buy a house or get credit again, and they fear what their friends and family might think of them. All of this is hooey. True, bankruptcy stays on your credit record for the next 10 years. But if your credit record is already blemished, it won't matter much anyway. The same creditors will be back at your door with new credit card offers immediately. You actually become a better credit risk, because you are not allowed to declare bankruptcy for another 7 years. You will still be able to get a mortgage, (though I wouldn't advise it at this time) Your friends and family never have to know. However, it may be helpful to share your problems with them, since they may be experiencing the same kinds of difficulties.

Of course there will be the naysayers who will try to make you feel ashamed by saying things like: "No one forced you to borrow the money. It is your responsibility to pay it back. You made the choice, you were the stupid one. If you take the easy way out, you're a coward." My advice is not to listen to them. Bankruptcy was built into the system for a reason. Used judiciously, bankruptcy helps keep the financial system running smoothly. It is a legal (for now). Its contribution to a healthy financial system is that it allows for renewal. It is also practiced by big business all the time. In fact, Bush buddy Ken Lay's company Enron was one of the largest bankruptcies in history. And we can rest assured that as one of the biggest contributors to President Bush's campaign, Mr. Lay is still living large somewhere down in Texas.

You are not at all "stupid" for making the mistake of getting into debt over your head. As the old saying goes, "Fool me once, shame on you. Fool me twice, shame on me." The credit card industry spent billions of dollars on slick advertising, they sent (and continue to send) billions of credit applications to people each year. They don't check to see who can and cannot pay back the money. They are simply playing a numbers game. They go so far as to send pre-approved cards - actual cards - into people's mailboxes. They tempt you with the benefits, and keep the fine print small and hidden. Now they claim that they are loosing too much money because of their wrong-headed business practices, so they want to change the rules. They want a bailout, and they have the power and the political muscle to have the Republican-controlled government change the laws in their favor. From this perspective, it is the banks that are the real cowards.

A credit card company that charges 29.99% interest is doing nothing more than loan sharking, under the guise of banking. This is legalized theft, and it is your responsibility to just say no. They want $1,300 back for every $1,000 they loaned you. Sure, it was written there, somewhere in the fine print when you took out the loan. Or maybe it was in one of the unilateral addendums to the agreement that they impose on occasion. But part of the fine print was that if you got in over your head, you could always declare bankruptcy and walk away. Once again, they are unilaterally changing the rules.

But why the law change? According to their website, http://www.mbna.com/about/index.html MBNA is the world's largest independent credit card issuer. And according to financial data at Marketwatch.com they earned 2.54 billion dollars last year. Citigroup, another large issuer of credit cards, last year earned 16.38 billion dollars. From these figures, does it sound like these banks are hurting? Is a change in the bankruptcy law justified? Especially when half of all U.S. bankruptcies are caused by soaring medical bills and most people sent into debt by illness are middle-class workers with health insurance? "Unless you're Bill Gates you're just one serious illness away from bankruptcy," says Dr. David Himmelstein, associate professor of medicine at Harvard Medical School.

The banks are already making fat profits. Do they really need this law change that will contribute to an entirely new class of working poor?

Larger Context: The Big Squeeze

The new credit card minimums and bankruptcy law are taking part against a larger backdrop of rising prices and falling wages. Just look at what is happening in the world around us:

As stated above, new banking rules are slated to increase monthly minimum payments.

The cost of healthcare and other services that cannot be imported from China are only going up.

With a revaluation of the Chinese Yuan (devaluation of the dollar) that the Bush Administration so badly wants, the price of imported goods will be going up.

Oil prices continue to hit new highs. Some are predicting that the price of oil will reach over $100. This means gas prices are going up. How well are you prepared to deal with $4/gallon gas?

There are problems with private pensions and social security. Should these collapse, are you able to fund your own retirement?

Interest rates are rising. This will push up all borrowing costs, including house payments on ARMs. Is there enough leeway in your budget to compensate for this?

Real wages are falling.

Periods of wage deflation make it incredibly difficult to pay off debts. If Robert Prechter is right in his prediction of a deflationary depression, we are all in for a world of hurt. Going into it, you need to put yourself on the most solid financial footing that you can. In his book Conquer the Crash, Prechter advocates getting out of debt as soon as possible (though he does not specifically mention bankruptcy), saving money, then using the cash to buy assets at rock bottom prices when the deflationary period has ended.

All of these factors, combined with the closing of the bankruptcy window, make it imperative that you seriously consider your options for a fresh start before it is too late.

A Fresh Start

If you are in debt over your head, bankruptcy is your opportunity to have a fresh start, armed with the new financial knowledge that you have acquired. But if you simply go back to your old spending ways, however, you will have wasted this opportunity. In addition to just clearing your debts, you need to make a new commitment to dealing responsibly with your money. First, get out of debt. Second, DO NOT GET BACK INTO DEBT. Learn to save money and invest it wisely. One of the best books I know for this is called Your Money or Your Life, by Joe Dominguez and Vicki Robin. It will help you think about money in an entirely new way.

As an example of the new thinking: If my friend K chooses to declare bankruptcy, over the next 10 years she will be able to keep and save an extra $500 per month, rather than sending it to MBNA. If she chooses to move closer to work and get rid of her car, she can save another $400/month (or more!) maintenance, gas, insurance and parking expenses. If she kicks her caffeine addiction and gives up her daily Starbucks, she can save an additional $100 per month. That's $1,000 in her own account, each month, or $12,000 per year, and $120,000 over 10 years, not counting interest earned. At 5% annual interest, it compounds to over 178,000. Five percent may not sound like a lot, but would your rather earn 5% or pay the bank 30%?

My advice to her: Just do it! As for you, dear reader, think it over from all the angles. But remember, the clock is ticking. The bankruptcy window slams shut on October 17th, and minimum payments are set to double.