One reason for the new Bankruptcy law, which went into effect in October 2005, was to make it more difficult for millions to never pay back the billions of credit card debt they owed.  Now we are seeing the reality after the laws passage.  People can be forced into Chapter 13 plans, to repay their debts, but many of the plans fail. Debt counselors report that the overwhelming majority of people who they see still want to go through bankruptcy.  This is despite a means test, which means more wealthy people could be forced to sell more of their possessions.  The means test is that if their family income is greater than the median income for their State for a family that size, they have to pay off some of their unsecured debt.

    A record 500,000 people and families filed for bankruptcy in the last two weeks before the new law went into effect.  Now, the credit card companies and banks are seeing the ?Merchant of Venice? effect.  They may demand a ?pound of flesh? but, not only is it not saleable, but if people are broke there is not too much you can do.

    The large number of people going broke is in part due to the easy lending policy of lenders.  Credit card lending has mushroomed from $190 billion in 1990 to over $700 billion today.  Have family incomes increased by a factor of four?  Of course not.  That would imply compound increases of income and/or inflation of over 10% a year.  Statistically it is determined that a m

arginal amount of income, including in late payments can be made on more poor and marginal people.  The banks and credit card companies should not then complain that 20-30% of a class of financially marginal people were not able to pay their debts and then either disappeared or filed for bankruptcy.

     There are millions of Americans, who bought houses as part of the post late 1990s real estate boom.  Since they often could not with conventional mortgages afford to buy the house that they needed, they resorted to exotic mortgages.  These are the Adjustable Rate Mortgages (ARM) and payment of Interest Only (IO).  Often on these mortgages, you make payments on interest only for the first three to five years, on your mortgages.  After the IO period, you not only have to pay the interest and a portion of the principal, but you have to pay back the interest on the deferred principal.

       For as long as the housing bubble was continuing, the solution to this was fairly straight forward.  A family would sell their home after three to five years at a much higher price than they originally paid.  They would pay off the mortgage, and then start the cycle over again by buying another overpriced house with an exotic mortgage for a few years.  Now, that the housing bubble is beginning to deflate, the above is not an option any more, and families are being forced to let their home be foreclosed on and go into bankruptcy.  Alternatively, they could get additional credit card loans to continue to pay off the ballooning mortgage.  That will just worsen their debt situation.