Credit counseling agencies should help, not profit

The bankruptcy law passed by Congress in 2005 was intended to help consumers stay out of debt. At least, that’s how Congress explained it. One of the provisions of the law, which ran hundreds of pages, was to require that any consumer seeking bankruptcy protection from their creditors must first undergo mandatory credit counseling. The idea was that if consumers had some formal financial training, they might stay out of trouble in the future.

It hasn’t worked out that way. Most people who attend counseling sessions are so far in debt that nothing can help them. The problem for a lot of consumers, however, is that, whether they could be helped or not, they were offered help by unscrupulous agencies determined to make some money off of people with debt problems. The problems are so widespread that the IRS is sending alerts to all agencies, whether they are under investigations or not.

Agencies that help under the bankruptcy law are required to be nonprofit, but a number of those under investigation were found to be tied to for-profit companies. Employees were compensated according to how many customers they could get to enroll in debt management plans, where the agency acted as a middleman for indebted consumers who needed to repay their debts. Instead of urging these debtors to file for bankruptcy, they encouraged them to enroll in the repayment plans, which yield a monthly fee to the agency for managing the repayment.

Some customers complained that their counselor was trying to enroll them in a debt repayment plan just minutes after they walked in the door. According to industry professionals, it simply isn’t possible to adequately assess someone’s financial problems in the fifteen or twenty minutes that some counselors were spending. They weren’t trying to help; they were simply trying to profit.

Surely, this is not what Congress had in mind when they passed the law requiring counseling. Even the most cynical among us would like to think that some members of Congress had help in mind when they made the decision to require consumers to seek it.

For the moment, the IRS has not disclosed the names of the agencies involved. As investigations continue, it appears that some criminal charges will also be filed against some unspecified agencies.

It goes without saying that not all counseling agencies are fraudulent. But it does make it harder for consumers who have a genuine need for some sound financial advice to find someone who will do that without trying to make a quick buck off of someone who is already deep in financial trouble. Some agencies who are not in trouble are hoping that this effort by the IRS will “clean up” the industry by getting the less-than-honest people out of the business for good. That isn’t likely; there’s too much money to be made. For the time being, anyone with a debt problem would be encouraged to choose their credit counselor wisely.

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