Bankruptcy
New bankruptcy law requires credit counseling
ByAmy Buttell Crane
Bankrate.com
Financial management
The back end of the twin requirements is a two-hour personal financial management education class that consumers must attend before a bankruptcy can be completed, or debts discharged, in industry lingo. According to the U.S Trustee's Office, the curriculum for this class must include:
- Budget development: Learning how to set short and long-term financial goals, the difference between net and gross income and classifying expenses as "fixed, variable or periodic."
- Money management: Learning to keep good financial records, how to comparison shop, differentiate between wants and needs, types of insurance and what coverage is necessary, and the difference between short- and long-term savings.
- Using credit wisely: Learning the types and sources of loans and credit; identifying potential credit problems, how to use credit appropriately and understanding credit ratings.
- Consumer information:
Learning about consumer resources, consumer laws and regulations.
This class also will have a fee, which hasn't been specified yet, although agencies can't turn away anyone because of their inability to pay. If a couple is filing for bankruptcy, each individual must take both courses and receive individual certificates, which means double fees in many cases.
Approved providers
The U.S. Trustees Program has designed procedures and applications to vet applicants who wish to provide these classes. Nonprofit credit counseling agencies and attorneys are eligible to provide the credit counseling briefing and personal financial education seminar. In addition, certified public accountants, certified financial planners and teacher certificate holders, among others, are also qualified to conduct the personal financial education seminars.While most consumer credit counseling agencies that will provide these services are qualified as nonprofits by the IRS, Plunkett believes that some agencies shouldn't qualify because they engage in activities outside the scope of traditional nonprofits. What many consumers don't realize, Plunkett says, is that the consumer credit counseling industry was founded by companies and banks issuing credit cards and still receives a good deal of funding from that industry.
Because the credit card industry is anxious to recoup as much money as possible from consumers experiencing financial difficulties, credit counseling agencies are rewarded financially for steering consumers into debt-management plans, he says. These programs consolidate consumers' unsecured debt and may offer a sweetener in the form of a reduction in interest rates. Unfortunately, secured debt -- including mortgages and car loans -- aren't part of these plans and are usually what force consumers to consider filing for bankruptcy.
In April 2003, the Consumer Federation of America, or CFA, and the National Consumer Law Center, or NCLC, issued a report, "Credit Counseling in Crisis: the Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New Market Entrants." This report charged that many consumers were being ill-served by the credit counseling industry and that for some consumers, these agencies were making their problems worse rather than better.
While some things have improved in the past two years, many problems remain, Plunkett says. "Our big fear is that this requirement may make things worse for many consumers," he says. "It's one thing for people to voluntarily seek help from an industry in turmoil, but now the federal government is forcing people into the hands of credit counseling agencies that could actually harm them."
Cunningham says that her agency is doing all they can to help consumers in financial distress. "For the first time in history, financial education is written into federal law," she says. "We're happy about that. We feel that the legislation is thorough and that the Trustees are aware of the industry and are taking steps to maintain high standards in those that are approved."
How to find the right provider
When considering bankruptcy, don't sign up with the first agency you find. Instead, follow these tips -- provided by the CFA and NCLC -- to find an agency that will help you figure out what is in your best interests:- Shop around by phoning at least two or three agencies before deciding which one to use.
- Seek an agency that offers a wide variety of services, including face-to-face budget counseling, savings and debt management classes. Avoid agencies that provide only a debt-management program.
- Scope out all fees from both the agency and your creditors. Avoid those that charge only "voluntary" fees as there will be high pressure for you to pay them. Also avoid agencies that provide extra compensation to employees who sign up consumers for debt-management programs.
- Investigate the agencies' and the employees' credentials. Just because an agency is a member of a trade group or a nonprofit doesn't mean they are right for you. Make sure counselors are experienced and have taken classes that have lasted longer than a few weeks.
- Don't sign on for any debt-management plan until you have all the specifics in writing and your creditors have agreed to the terms. Find out exactly what type of concessions your creditors are making, how much you are expected to pay per month and how long your payments will last.
- Find out whether credit counseling will negatively affect your ability to get future credit. Credit score services don't mark consumers down for getting such counseling, but some individual creditors do.
