By Melissa Allison and Emily
Heffter
Anyone
who wants to file personal bankruptcy now must visit a credit counselor first,
thanks to a new bankruptcy law that kicked in last fall. Lenders hoped
counseling would persuade some borrowers not to file
bankruptcy.
But the sessions aren't changing anybody's mind about
filing, credit counselors say, and the required counseling is putting the
agencies in a financial bind.
Credit-counseling agencies say they bring in a
significant portion of their revenue from debt-management plans but lose money
on each pre-bankruptcy counseling session.
One state agency figures it costs $133 for a 90-minute
counseling session, but it collects about $36. Costs are lower for agencies that
do part of the counseling by Internet.
Debt-management plans allow consumers to make one
monthly payment to the agency, which divides the money among creditors. Agencies
get a "fair share" fee from creditors for a portion of the amount they are able
to collect.
Agencies frequently negotiate better pay-off terms from
lenders, who would rather have a portion of what's due than none of
it.
If agencies could persuade consumers to use
debt-management plans rather than file bankruptcy, they would collect fees on
the plans.
But almost all of the 99,000 or so people who have gone
for pre-bankruptcy counseling since October have headed into bankruptcy
instead.
Agencies say they can't afford the wave of new clients
long-term unless more people sign up for debt-management plans or the agencies
find another source of income.
"We're only a few months into this," said Catherine
Williams, spokeswoman for Money Management International, a large agency based
in
But it would have helped if officials had considered the
financial burden it could place on credit-counseling agencies, Williams
said.
"We're going to continue to do the counseling and worry
about where the money comes from later," said Laurie Tufford, chief executive of
Consumer Credit Counseling Service of the Tri-Cities in
Even though it's expensive to provide pre-bankruptcy
counseling, agencies pursue the approval to do it because it gives them
legitimacy in an industry that is rife with abuse.
"It's kind of a nod of approval, if you will," said Greg
Cannenberg, the director of counseling at Boise-based Debt Reduction
Services.
The Financial Services Roundtable, an association of the
nation's largest lenders that pushed for the counseling sessions in the new law,
has given grants to some agencies approved by the U.S. Trustee's office for
pre-bankruptcy counseling, including Tufford's.
The grants, based on the size of the agencies, range
from $22,500 to $300,000.
The
Employees
added
By contrast, Consumer Credit Counseling Service of
Greater Atlanta has added 50 employees, for a total of about 200, to handle the
25,000 pre-bankruptcy counseling clients it saw in the first four months after
the law went into effect.
"We basically tripled our workload," President Suzanne
Boas said. "We're cautiously optimistic that we'll be able to continue to
provide the service."
About 140 agencies are approved for pre-bankruptcy
counseling in U.S. Bankruptcy Court in the Western District of
Washington.
Agencies' new financial troubles demonstrate that the
credit-counseling requirement isn't working, said Travis Plunkett, legislative
director for the Consumer Federation of America.
"It's beginning to look like it doesn't help [debtors]
in any way," Plunkett said. "It merely becomes an administrative
burden."
Bankruptcy attorneys agree.
Brad Botes, executive director of the National
Association of Consumer Bankruptcy Attorneys, is worried that agencies will
raise their fees and "create a bigger burden on people who are in a desperate
financial situation." He hopes Congress will remove the pre-bankruptcy
counseling provision.
No one, including the roundtable, can keep pouring money
into a system if it's not viable, said Steve Bartlett, president of the
organization.
How it'll play
out
As the new law plays out, credit-counseling agencies
might be forced to push the credit-card industry for more money and for better
provisions for consumers, Plunkett said.
The industry lobbied for the counseling provision, but
Plunkett said it hasn't backed up its support with much
money.
In the meantime, Plunkett worries that the financial
struggle to provide the service could cause a conflict of
interest.
"An agency might choose to enroll someone in a
debt-management program when it's not appropriate because they're in a bind," he
said.
Over time,
He also expects more to choose debt-management plans
over bankruptcy in the future, which will bring in more money for counseling
agencies.
Agencies will find some way to make the system work,
"Right now, it's not a stable financial situation," he
said.
Melissa Allison: 206-464-3312 or mallison@seattletimes.com
Emily Heffter: 206-464-8246 or eheffter@seattletimes.com