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Recent articles by Liz Pulliam Weston: • Executors can inherit an unholy mess, 8/27/2005 • How to spot a shabby remodel, 8/24/2005 • The college dorm-room checklist, 8/21/2005 More... |
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| The Basics | ||
| How to pick a $50 credit counselor | ||
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The new bankruptcy law requires a stop at a credit counselor first. Make sure you dont settle for drive-by advice. By Liz Pulliam Weston Soon, debt-laden consumers seeking credit counseling will have one more decision to make: whether to seek out the real thing or settle for a "traffic school" version that will allow them to file for bankruptcy. Experts predict a fleet of counselors will spring up to meet demand from the roughly 1.5 million Americans who, starting Oct. 17, will be required to complete 90 minutes of credit counseling before they can file for bankruptcy. That's on top of the 3 million or so people who contact credit counselors annually now, hoping for help with their finances or enrollment in debt-management plans to avoid bankruptcy. The U.S. Department of Justice, which drafted the guidelines for implementing this aspect of bankruptcy reform, has already received more than 1,000 applications from agencies wanting to provide this counseling, for which they will be allowed to charge up to $50 a person.
The Justice Department says the sessions must include:
$50 x 1.5 million filers = major money Agencies that want to offer this counseling must be organized as nonprofits. But nothing prevents them from seeing the surge of potential clients as one heck of a business opportunity. Related news and commentary on MSN Money "Fifty bucks times 1.5 million people," noted Sam Gerdano, head of the nonpartisan American Bankruptcy Institute, "is a lot of money." The economics of credit counseling make it likely many of these providers will offer large group sessions, telephone counseling and consultations via the Internet rather than the face-to-face sessions offered by traditional credit-counseling agencies, Gerdano said. Hence the comparison to traffic schools, where those who want a traffic ticket erased for insurance purposes spend a few hours in a huge classroom or in front of a computer. People who pay attention might learn a thing or two, but it's questionable whether the experience makes them better drivers. The pending credit-counseling situation disturbs many consumer advocates and the old-school credit counselors, who emphasize personalized counseling and want to continue doing so (and who, of course, will be competing with the new breed of mass-audience counselors). "The intent of the (bankruptcy reform) legislation is to change consumers' attitudes and behaviors," said Susan Keating, president and CEO of the nonprofit National Foundation for Credit Counseling, the oldest organization of credit-counseling agencies. "If the result is drive-by counseling and education, we will not have fulfilled the intent of this particular legislation." Keating acknowledges, though, that $50 won't cover the costs of providing one-on-one sessions for the new influx of bankruptcy hopefuls. Currently, most NFCC agency budgets come from a share of the money that clients pay to credit card companies and other lenders through debt-repayment programs. Off-the-shelf opportunists That's not a model that should really work with this new gang of borrowers, most of whom are too far gone to pay their bills (and some who will have trouble scraping together the $50). Keating hopes that the credit card companies and lenders providing most of credit counselors' funding will kick in more money. Her agencies won't ignore telephone and Internet counseling for clients who prefer that route; many already provide these services. But advocates like Consumer Federation of America and Consumer Action worry that some counselors will take advantage of the situation to skim more cash from vulnerable debtors. They're most concerned about the heavily advertised, new-school credit counselors who, in the past, have skipped education and counseling in favor of 20-minute (or shorter) sessions that shoehorn consumers into credit card payoff plans. These are the outfits that have been generating most of the bad press lately. Regulators have shut down a handful, including one-time hotshot AmeriDebt, accusing them of deceiving consumers and fronting as nonprofits, while funneling borrowers to their very-much-for-profit affiliates. (For details, see Feds sue, say debt counselor duped debtors.) The IRS finally got into the act, as well. IRS Commissioner Mark Everson says he has half of the credit-counseling agencies under audit. His agency has yanked nonprofit status from companies representing 20% of the industry. But that still leaves plenty of bad guys out there. The consumer advocates aren't confident that the Justice Department will screen them out. The advocates are especially worried that unethical counselors will coerce bankruptcy bound debtors into impractical repayment plans, just to collect additional fees from creditors. 3 steps to find the right counselor If you might be in a position to file bankruptcy after Oct. 17, or you're interested in credit counseling as an alternative to bankruptcy, you'll want to take the following steps:
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