Credit counseling agencies and consumers are hurt by new debt law

The bankruptcy law that Congress passed in 2005 was intended to completely reform debt law as we know it. There were a number of reasons for passing the law, but the primary one was that the credit card companies managed to get Congressmen to believe that most people who file for debt relief through the courts are fully capable of repaying their debts and are filing just because they want to avoid repayment. Congress bought that philosophy, and the new law clamps down on debtors in some pretty serious ways. One of the most difficult of the law’s new provisions is that debtors must undergo credit counseling before filing for bankruptcy. This has had the effect of hurting the counseling industry and failing to help debtors.

Prior to passage of the law, few debtors attended counseling sessions, figuring that their debts were too large for them to be helped by financial advise. As such, the counseling industry simply wasn’t as large as it needed to be to handle the large influx of new clients that are now being railroaded through the system. Worse, the new law mandates that the fees charged to clients be “reasonable.” No specific dollar amount was mandated, but a fee of $50 was suggested. This has created problems for the industry, as that recommended fee doesn’t cover the cost of providing the service. Nor does it provide enough additional funds to provide for the hiring of more help.

The consumers aren’t reaping any benefits, either. Instead of several, in-depth sessions that would allow a counselor to take a serious look at a debtors finances and discuss how he or she might logically find a way to resolve their debt problems, the “counseling” mostly consists of either a large group meeting and some cursory “don’t spend more than you have” advice. In other cases, the client simply receives information via the Internet through some sort of automated program. 

If the purpose of passing the law was simply to make it so difficult and time consuming to file that consumers might be discouraged from doing so, the law may have been successful. If, as Congress suggests, that the purpose was to get people back on their own two feet so that they could repay their debts instead of having the courts wipe them out, the law has probably been a waste of time. And the counseling industry, which used to at least pretend to help consumers with their problems, is now just a revolving door for people with $50 bills. Is this really what Congress had in mind?

Studies show that nearly 97% of the people who have attended counseling sessions have still qualified to file for debt relief, so it is looking more and more as though this law, like many that come from Washington, is just a nuisance that is wasting the time of all involved and helping no one.

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