Credit counseling agencies are not discouraging bankruptcy filers

The credit counseling industry has benefited tremendously from the overhaul of the Federal bankruptcy code passed in 2005. The Bankruptcy Abuse and Consumer Protection Act was designed to make it more difficult for people who wish to avoid paying their bills to have their debts relieved by the courts. In order to thwart this activity, which proponents of the bill say is the leading cause of most bankruptcies, Congress put several obstacles in the path of would-be filers. One of these obstacles is the requirement that anyone considering filing for debt relief must first undergo credit counseling.

This has been great for the industry, as they are suddenly awash in clients. So many, in fact, that many agencies have had to resort to counseling people in groups and/or counseling people over the Internet. It’s far less personal, and not nearly as in-depth as it should be, but the Government-mandated $50 maximum fee that agencies may charge has limited the options of the agencies. They simply cannot provide enough help for the money paid them. Nevertheless, the industry appreciates the business that the new law has thrown their way.

There were several reasons for including credit counseling in the bankruptcy law. One of the reasons was to provide people with a bit of money management education that they otherwise would never receive. Few debtors ever have any sort of formal education when it comes to managing their money, so a bit of counseling could help them down the road. The other reason, and the more important one, is that it was assumed that counseling might be able to steer a number of debtors towards a debt management plan instead of having them file for bankruptcy. It is certainly the preference of the credit card companies that their customers repay them. Since the law was passed at the urging of the credit card industry, this provision of the law was inserted in order to encourage more debtors to pay their way out of debt.

It hasn’t worked. In fact, a recent study shows that a whopping 97% of all people who have undergone the credit counseling as required by the new law have gone on to file for bankruptcy. This shouldn’t come to a surprise to anyone; most people who file do so because they simply cannot pay their bills. The notion that people file for debt relief because they simply don’t want to pay is a myth. Most people file for bankruptcy because they have become victims of circumstances beyond their control. More often than not, this is either an unexpected job loss or a medical crisis, such as an illness or an accident. No one wants to file for bankruptcy; it destroys your credit score and makes it very hard to borrow money, find a place to live, or even get a job.

But the hurdle still exists. Unless Congress decides that the bill is flawed, debtors will continue to undergo counseling, whether it helps them or not.

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