On October 17, 2005 sweeping bankruptcy reform laws went into effect forever changing the rules of debt collection in this nation. Consumer advocates and the public appear to be completely unaware of the total and complete victory of the creditors under the new legislation. This article opens the door to the Trogan Horse so that consumers can prepare themselves for the worst.

The most important aspect of the bankruptcy code was the “automatic stay” provision. This allowed consumers to file for bankruptcy at anytime during the creditor’s collection process, putting an immediate stop to all contact and collection activities from the creditor. The new law requires that a debtor receive credit counseling from an approved non-profit credit counseling agency for 180 days prior to filing Chapter 7 or Chapter 13 bankruptcy.

While this may sound benevolent, a much closer look at the practical effect of this provision reveals the crafty peeling of the debtor’s rights. The 180 day requirement is to provide the credit counseling agency the opportunity to work out payment plans with creditors. However, during this same period of time the creditor is not restrained from collection efforts.

For example, let's say Jason is a homeowner in Jacksonville, Florida and is six months behind on his mortgage. As a rule, credit counseling agencies only work with credit card companies and have little or no training with dealing with mortgage companies. After receiving foreclosure papers, Jason goes to see his attorney to file for bankruptcy and is told that he must first seek credit counseling before filing for bankruptcy protection. Meanwhile, the foreclosure proceeds on schedule and a sale date is set 120 days later. However, Jason still has not completed his 180 day requirement. What will happen to Jason’s home? That’s right! The home will be sold and he cannot stop the sale by filing bankruptcy.

This is the most sweeping shift in debt collection in the past 50 years. Jason’s only hope will be to work out a repayment plan or a loan restructure with his mortgage company. This is a process called loss mitigation. Loss Mitigation works because lenders lose an average of $28,000 to $50,000 per foreclosure nationwide. It is a myth that the lender wants your home and makes a profit off of foreclosure. A lender has to pay attorney fees, court and collection costs, maintain fire insurance, hire a real estate professional, repair structural and other damage to the home, and pay property taxes. The homeowner can work out an agreement with the lender in over 90% of cases.