Credit counseling could help, but probably won’t, thanks to new regulations

With the Bankruptcy Abuse and Consumer Protection Act taking effect this month, consumers are hurrying to file for personal bankruptcy as soon as possible. The new law makes it harder, more expensive and more time consuming to file for bankruptcy, and increases the likelihood that debts will have to be repaid, rather than forgiven. The new law requires lawyers, higher fees and strict proof of debts and income, as well as a “means test” to determine if a debtor may file under the more forgiving Chapter 7 or the tougher Chapter 13. Adding to the burden for filers is a new requirement that mandates all bankruptcy filers undergo credit counseling prior to filing.

The purpose of credit counseling is to help the debtor assess his or her financial situation and to present various options for paying down existing debt and for avoiding similar debt in the future. This is generally a good idea, as most Americans do not receive any sort of formal financial training in school, even for something as simple as learning how to balance a checkbook. The problem is that the Federal government, aware that thousands of people will be crowding into credit counseling offices, has made the requirements for this counseling rather skimpy.

The counseling must be provided by approved organizations, and the government has begun, admittedly late, to approve counseling agencies throughout the country. A debtor must contact an approved agency, which may elect to charge a fee not to exceed $50 for the initial visit. Those agencies must agree to waive the fee for anyone who cannot afford to pay. So far, that seems reasonable. The part that begins to make little sense is this one: the counseling session must be 90 minutes in length, and may be conducted in person, over the telephone, or over the Internet.

Consulting with someone who has run up tens of thousands of dollars in debt, identifying their problems and helping them either organize their finances or create a repayment plan is not a simple task, and it is certainly not something that can be undertaken in a single visit. More importantly, it is something that works best on a face to face basis, where the debtor can present any necessary documentation in person. Doing it over the phone, or semi-anonymously over the Internet will probably be so ineffective as to be useless. Granted, it will meet the government’s requirement, and if that is all the concerned parties care about, then that will be fine. But if anyone is truly interested in having the debtor benefit from this consultation, then a brief online conference is hardly satisfactory.

Many of these Internet consultations will probably be “group” activities, in order to make up for the relatively low monetary compensation for the agencies. For all parties concerned, this mandatory consulting will probably be a colossal waste of time.

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