Bankruptcy law hits snag: few counselors
The new bankruptcy guidelines have created a new problem for the industry: not enough approved credit agencies.
John Accola of the Rocky Mountain News details the problem:
By John Accola, Rocky Mountain News
October 8, 2005
A week before a tougher national bankruptcy law kicks in, a shortage of "government approved" credit counselors threatens to undermine one of its key provisions.
Designed largely to weed out consumer cases where personal bankruptcy isn't the only option, the Bankruptcy Abuse Prevention and Consumer Protection Act requires debtors to undergo credit counseling within six months before filing for financial protection from creditors.
But as of Friday, the Justice Department reports that just 41 nonprofit credit counseling agencies - some equipped with call centers in Phoenix, Atlanta and Minneapolis - had been certified.
The law stipulates the mandatory counseling sessions, averaging 90 minutes, can be done in person, over the telephone or Internet.
Based on the sheer number of anticipated clients - nearly 1.6 million Americans sought bankruptcy protection in 2004, and many more are expected this year - consumer advocates are worried counselors will be hard-pressed to serve everyone.
At worst, they say debtors could be subjected to "drive-through" counseling, getting cursory sessions over the phone from their lawyer's office.
Counselors are planning to charge anywhere from $50 to $70 for the one-time sessions. But the law requires free sessions for those who can't afford to pay.
Travis Plunkett, legislative director of the Consumer Federation advocacy group in Washington, said relying heavily on toll-free counseling operations such as Money Management International, GreenPath Inc. and Springboard Nonprofit Consumer Credit Management to advise debtors on budget planning and financial rescue is not what Congress intended.
The new law allows the credit counseling requirement to be waived in areas where approved credit counseling agencies are "not reasonably able" to provide adequate services to filers.
"If this requirement is intended to offer legitimate, effective credit counseling, some people aren't going to get it unless they can do so in person," Plunkett said. "The point is, they should have that choice."
In Colorado, where bankruptcies have topped 21,000 a year since 2002, only five credit counseling agencies have been approved by the U.S. Trustee Program. All five are national operators headquartered out of state.
Jane Limprecht, spokeswoman for the Executive Office of U.S. Trustees in Washington, D.C., said nationally some 200 credit counseling agencies have applied for certification and that the rigorous application process is ongoing.
"We are continuing to review applications," she said.
The U.S. Trustee Program requires debt management companies seeking certification to complete an application that includes documentation of certain criteria, including nonprofit status, staff qualifications and a minimum three years of operation. Applicants also must obtain liability insurance and post a bond that varies with the size of the company.
Chad Gentry, executive director of Community Credit Counseling Services in Lakewood, said his nonprofit's application has been pending for months.
"We've spent $22,000 on compliance, and we still haven't got certification," he said.
Gentry complains of bureaucratic foot dragging in Washington, where the trustee executive office is handling the screening process instead of district trustee offices in states where the agencies are located.
Plunkett notes the credit counseling industry has a checkered past filled with consumer complaints of deceptive practices. Last week, The Washington Post reported that the Internal Revenue Service has denied tax-exempt status to a half-dozen credit counseling agencies, contending they depended too much on banks and credit-card companies for funding.
Many of the nonprofits waiting for certification or that already have been approved offer clients debt management programs that are negotiated with creditors. Clients generally pay a monthly management fee, and the nonprofits also get a percentage of money recovered from borrowers.
"It sounds like the U.S. trustee is taking a better-safe-than-sorry approach," Plunkett said.
The new law also requires that bankruptcy filers enroll in a certified debtor education course before their cases are discharged. The U.S. Trustee Program is required to certify the debtor education providers, as well.
Although many of the same credit counseling agencies have applied for the course work, Limprecht said the U.S. trustee hasn't certified anyone yet.
Application forms for just the pre-bankruptcy counseling weren't available until July 5.
"They are completely overwhelmed," Plunkett said referring to the trustee evaluators. "Any agency would be by these new rules."
Even with all 200 applicants approved, the new regulations present a formidable challenge for the credit counseling industry.
The National Foundation for Credit Counseling projects twice as many counseling sessions will be provided by its 115-member agencies seeking certification. To date, however, just 32 have received government approval, said foundation spokesman Robert Ensinger.
"It's a whole new landscape for credit counseling agencies," Ensinger said.
He said about a third of the foundation's members offer telephone counseling. Only about 10 percent provide counseling over the Internet, he said.
"We believe the best way to do counseling is face to face, where you can talk through the issues in person," Ensinger said.
Community Credit Counseling in Lakewood has sent Colorado bankruptcy attorneys introduction letters, touting 90-minute counseling sessions with debtors in a classroom setting.
Gentry said the personal interaction with clients contemplating bankruptcy is critical.
Of credit counseling agencies already approved in Colorado, only one - Houston-based Money Management International - has offices on the Front Range that will allow in-person counseling.
Operating under the banner Consumer Credit Counseling Services, the company lists offices in Denver, Aurora, Boulder, Lakewood, Highlands Ranch and Westminster.
But Jeanine Lipka, Money Management's director of branch counseling for the Western U.S., said the company expects a higher national demand for call-in counseling sessions. Money Management, which has 950 employees nationwide, already is hiring extra staff at its call centers in Fort Worth, Texas; Richmond, Va.; and Phoenix, she said.
"We're kind of in a wait-and- see mode as to what the volume will be," Lipka said.
In letters mailed this week, Denver bankruptcy attorney George Carlson notified clients who aren't going to make the Oct. 17 deadline that credit counseling is a requirement.
"I don't think anybody knows how these credit counseling agencies are going to work," he said.
accolaj@RockyMountainNews.com
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