Credit counseling agencies collecting fees and doing little else to help

The Bankruptcy Abuse and Consumer Protection Act, passed in 2005 by Congress, was intended to dramatically reduce the number of bankruptcy filings nationwide. The notion persists, encouraged by the credit card companies, that people file for debt relief from the courts simply because they don’t want to pay their bills. In truth, people file for bankruptcy because they can’t pay their bills. The reason they can’t pay their bills is because most people have little or no formal financial training and don’t understand how to handle credit or money wisely.

There’s a solution to a populace that doesn’t know how to handle money - it’s called credit counseling.

In an ideal scenario, people who were just beginning to have financial troubles would seek counseling in order to understand how their problems were developing. A bit of education regarding money management and debt management would help. Under some circumstances, some debt consolidation or management plans might be offered in order to ease the burden of existing debt. Armed with this new information, obtained long before the financial problems get out of hand, the consumer can get his or her finances in order and avoid having to file for bankruptcy later.

Unfortunately, that is a pipe dream, and the situation doesn’t work that way. Instead we have a system that doesn’t encourage people to seek financial help until they are ready to file for bankruptcy. At that point, the law steps in and says, “You have debts that you can’t pay? You need counseling!” That would be great, but recent statistics show that by the time people are ready to file for debt relief, they are so deeply in financial trouble that no amount of counseling or repayment plan can help them. In fact, 97% of people who have enrolled in the legally mandated counseling since the new law took effect have gone on to file for debt relief in court.

Making the situation worse is the fact that the IRS has revoked the tax-exempt status of 41 counseling agencies that have been found to offer little help to consumers. Instead of offering non-profit help, these agencies have been attempting to steer their clients into for-profit management plans, whether they are suited to the customers needs or not.

It’s an ugly situation all around. Until we can address the real problem - Americans need sound financial education before they get into money troubles, the entire counseling and bankruptcy system we have in place remains a charade that helps no one. It’s not helping the credit card companies; they are still not getting paid. It’s not helping the counseling agencies; they are finding that they can’t help anyone. And it’s not helping the customers. They end up filing for debt relief and have to endure ten years of a bankruptcy notation on their credit report.

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