Blog sponsored by Bankrupt-Law.com


Critics say bankruptcy law flawed

By SHERYL JEAN

Knight Ridder Newspapers

ST. PAUL, Minn. - Ken Vierling worked hard to become top salesman at a local
printing company. He lived a good life and tucked away money for retirement.
Then came an ownership change that erased his job about 18 months ago.
Vierling ended up in a job that pays 25 percent less. He fell behind on his
bills. Collectors started calling, threatening to repossess his Fridley home
and his Ford Explorer.
Vierling, 49, began thinking about filing for bankruptcy at the beginning of
the year when he realized he wouldn't be able to pay his 2005 income taxes.
His first stop, dictated by the new bankruptcy law that took effect last
fall, was credit counseling to review his finances and consider repayment
options. He was underwhelmed.
"It was very vague," said Vierling, who filled out an online counseling
questionnaire in less than an hour. "I didn't get any real benefit out of
it. It basically brought forward things I already knew."
And it didn't suggest a better alternative than filing for bankruptcy court
protection, which he did four days later to restructure some $25,000 he owed
in taxes, credit card debt and home-repair bills.
Vierling's situation, some experts say, illustrates a basic problem with the
credit-counseling provision of the bankruptcy law: It's too late by the time
many consumers get counseling. They're already in dire financial straits,
with debts far outweighing income, and they have no choice but to file for
bankruptcy.
Some observers say the early results show that credit counseling isn't
working as intended. It doesn't appear to be shifting more people into
debt-management plans instead of filing for bankruptcy.
Steve Bartlett, president of an industry association called the Financial
Services Roundtable, supports the law but says it's flawed.
"Early on, most of the pre-bankruptcy counseling is not especially useful
because it's only occurring for people right before they go into
bankruptcy," Bartlett said. "The flaw is that the bankruptcy counseling is
only occurring at the end of the process when you have little option. That's
not what we wanted or the agencies wanted."
Supporters and skeptics alike say it's too early to draw conclusions.
"It's going to take us a couple of years to sort out the impact of the law,"
said Susan Keating, chief executive of the National Foundation for Credit
Counseling.
However, a foundation report released in April provides a snapshot of the
law's first six months, raising questions about long-term funding and
whether the credit-counseling industry can meet demand as bankruptcy filings
increase. These issues must be addressed soon "if credit counseling is to
work," Keating said.
The new bankruptcy law, which took effect Oct. 17, 2005, was designed to
make it more difficult for people to erase their debts under Chapter 7
bankruptcy.
For the first time, it mandated financial education, requiring consumers to
go through credit counseling to consider alternatives before filing for
bankruptcy and to attend a debt-education workshop after bankruptcy.
Nationally, 150 approved nonprofit agencies had led nearly 263,000
counseling conferences with potential bankruptcy filers through May 10,
according to the U.S. Trustee Program, which oversees the bankruptcy system.
Each person receives a counseling certificate good for six months.
Americans like to spend money -- in many cases, more money than they earn.
Total U.S. credit card debt exceeds $800 billion. Easy credit has helped
fuel a spree that has contributed to a tripling of bankruptcy filings since
1990.
Last year, more than 2 million people filed for bankruptcy in the United
States, a record.
So far this year, filings have tumbled to about one-third of 2005 levels
nationally.
Some observers point to the sharply lower number of personal bankruptcies as
proof that the new law is working, but there are several reasons for the
decline.
A steep spike in October filings -- as people hustled to file for bankruptcy
amid uncertainty about the new law -- makes it difficult to gauge the law's
impact. In that month, more than 600,000 cases were filed nationally.
Some experts say the numbers may also be down because filing is more
expensive and some consumers mistakenly believe the bankruptcy court's doors
are barred to them.
Today's typical bankruptcy filer is a working person overwhelmed by credit
card debt or hit with the unexpected -- a huge medical bill or a lost job,
for example. Many just don't know how to handle money.
The person typically is 25 to 54 years old with a high school diploma or
some college education, according to the Institute for Financial Literacy,
which offers credit counseling.
"These are not bad people," said Jim Kroening, director of consumer credit
counseling service for the Stillwater-based nonprofit Family Means. "These
are people who have problems, made poor decisions or been in situations that
weren't controllable. They just kind of get caught up in life, and life is
expensive."
Credit counseling is proving to be pricey for consumers and the agencies
providing the service.
Agencies often reduce or waive fees because many people can't afford to pay
for counseling. Vierling said he struggled to come up with the $50 for his
counseling session.
Most don't. Consumers paid on average about $38 for counseling sessions,
according to the NFCC. That doesn't cover the cost of providing the service,
it says.
The result is an estimated $12.4 million shortfall for its member agencies,
which make up 70 percent of certified bankruptcy counselors.
How to make up the difference is a problem. The bankruptcy law didn't
address funding for credit counseling. Credit-counseling agencies are
seeking donations and grants to supplement their budgets.
The Financial Services Roundtable has committed up to $10 million in grants
to help out, but most of that money already has been distributed, Bartlett
said.
Most observers agree that more time is needed to gauge the effect of the new
law. Still, some say the system should be tweaked now.
A group of congressional members have asked the U.S. Government
Accountability Office to study the credit-counseling fees, the type of
counseling provided and the quality standards. Other key provisions of the
new bankruptcy law face other challenges.
The Financial Services Roundtable is working on ways to attract consumers to
credit counseling earlier -- at the first sign of trouble. In March, the
group set up a Web site at http://findbankruptcyhelpnow.com/ to help
consumers find credit counselors and learn about bankruptcy.
"We don't want to continue the process of pre-bankruptcy counseling where
you just get a certificate and then file bankruptcy," Bartlett said.
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