Debt Consolidation and Credit Card Counseling

Credit counseling agencies are burdened by investigations, volume and price pressure

It’s an interesting time to be working in the credit counseling industry. The Bankruptcy Abuse and Consumer Protection Act, passed last year, requires that anyone considering filing for personal bankruptcy first undergo mandatory counseling prior to filing for debt relief through the courts. That would seem to be a huge plus for the industry, but that gift from Congress came with a few problems attached.

The first is that any agency that wanted to deal with pre-bankruptcy customers had to first be approved by the U.S. Trustees office, which wasn’t able to approve many companies before the law took effect in October, 2005. This meant that anyone who wanted to file for bankruptcy shortly after the law took effect had tremendous difficulty finding an approved counselor, even though the country is full of counseling agencies. This had the effect of leaving many agencies having to turn customers away when they should have had a bumper crop of willing, paying clients.

The other problem is that Congress also mandated a fixed fee of $50 for a “required” 90 minute counseling session. This price was fixed in order to ease the burden of forcing people who are already in financial trouble from having to pay unaffordable fees for a service that they were now required to buy. On the other hand, that fee is rather meager, especially for a 90 minute, first-time session. There’s a lot that has to be done when meeting with a new client, and that $50 may not cover even the costs of doing business, especially in parts of the country where doing business is expensive, such as New York or Boston. The result is that many agencies have resorted to conducting counseling classes, where a single counselor meets with a number of people as a group. That’s more cost effective for the agency, but it’s of little use to the clients, who clearly need one on one assistance with their problems. So far, this has worked out poorly for everyone.

The Federal Trade Commission has been investigating the industry as a whole lately, as more and more complaints come in about companies that are promising debt relief but are leaving their customers worse off than ever before. This has led to a number of agencies being closed down for improper activities, which, in turn, has led to an increased shortage of available counseling.

And finally, the credit card companies have recently doubled the minimum payments due each month. With the average American owing some $10,000 on their credit cards, this has led to an even greater number of people who cannot meet their financial obligations. And if they cannot do that, they must file for bankruptcy. But first, they must seek counseling...

It’s a tough time to be in the business of offering assistance to those with financial problems.

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