Credit counseling agencies are stressed by the new law

The recently passed bankruptcy law that Congress enacted in 2005 was designed to minimize bankruptcy filing. The idea was that most people who file can really afford to pay; they just don’t want to. This new law was planned in concert with the credit card companies to make it harder for consumers with debt problems to have their obligations wiped out through the courts. The plan was twofold - consumers would have to demonstrate that their income was such that repaying debts was impossible, and they would have to undergo credit counseling where, presumably, they would be steered into a debt management plan.

It hasn’t worked out that way, and no one is happy about it.  Counseling agencies don’t make their profits from talking to people about their debt problems. They make their money from encouraging people to pay off their debts. It works like this:

The agencies negotiate better interest rates or waivers of fees from the customer’s creditors. The agencies then create a debt management plan for the customer, who pays a regular monthly sum to the agency. The agency takes a portion of that payment as a fee and divides the rest among the creditors, who are willing to take less rather than get nothing. Once the debts are repaid, the agency also gets a portion of the repaid debt from the creditors as a fee, so the agency gets paid two ways.

That’s how it’s supposed to work. Unfortunately, it’s working like this:

The customers are coming in for their mandatory counseling, for which they are charged a fee that averages about $50. This fee doesn’t really cover the cost of the counseling session, which most agencies estimate costs them more than $100. So the agencies are losing money on each and every session.  To make matters worse, 97% of those who have recently seen credit counselors have ended up filing for bankruptcy, because they simply did not have the means to repay their debts.

The plan was supposed to be a win-win situation for all concerned - the creditors would get some or all of their money back and the agencies would be awash in customers who wanted or needed to enroll in debt management plans. The creditors would be happy and the counseling agencies would be happy.

Instead, customers are filing for bankruptcy in numbers that equal or exceed those from before the new law was enacted. The creditors aren’t seeing any more money. The agencies are being forced to hire more help to deal with the influx of customers, who don’t pay enough money to cover their counseling and then end up filing for bankruptcy just the same, leaving counselors with no income from the anticipated debt management plans.

In short, the entire new bankruptcy plan has been pretty much a disaster, as most analysts predicted. It remains to be seen how this new law will pan out, but so far it has just been a huge inconvenience for everyone.

Copyright © 2005-2007 by Retro Marketing. All rights reserved.