Limited credit counseling may not be helping anyone

The credit counseling mechanism that has been established to control the flow of pre-bankruptcy debtors is flawed and is helping no one. Sweeping bankruptcy reform laws requires that people with debt problems submit to credit counseling prior to filing for bankruptcy and that they be able to demonstrate that they have been counseled.

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The bankruptcy law that Congress passed in the spring of 2005 was intended to fully reform debt law as we know it. There were several reasons for reforming bankruptcy law, but the primary one was that the credit card companies and legislators believe that most people who apply for debt relief through the courts are fully capable of paying back their debts and are filing just because they want to avoid repayment. The revised law clamps down on debtors in some pretty significant ways, including a requirement that people must undergo professional financial guidance before filing for debt relief.

The counseling provision has had the effect of harming the credit counseling industry and failing to help consumers. Prior to enactment of the law, few debtors attended counseling sessions, believing that their debts were too large for them to be helped by counseling. The law did not create a fee schedule for credit assistance companies, but a fee of $50 was suggested. The counseling industry simply wasn't as big as it needed to be to handle the large influx of new debtors that are now being shoved through the system. The suggested pricing structure has created trouble for the industry, as that suggested fee does not cover the cost of providing the counseling, nor does it provide enough funds to provide for the hiring of more counselors. The new law mandates that the costs billed to debtors be "reasonable."
 

In some cases, the client simply receives help via the Internet through some sort of automated program. Rather than a series of in-depth sessions that would allow an advisor to take a serious look at a debtor's finances, the aid mostly consists of either a large group meeting and some cursory "don't spend more money than you can afford" advice. The consumers are not reaping any benefits from the mandatory counseling clause.

If, as Congress says, the purpose of the provision was to get debtors to be self-sufficient so that they could repay their financial obligations rather than having the courts wipe them out, the law has certainly been a complete waste. If the purpose of passing the bankruptcy law was merely to make it so difficult and drawn-out to file that debtors might be discouraged from doing so, the law may have been successful. Is no-help assistance actually what Washington had in mind? The financial assistance industry, which used to made an effort to help consumers with their problems, is currently just a turnstile for people with fifty dollar bills.

Statistics show that almost 97% of the people who have attended sessions have still met the requirements to apply for bankruptcy. It seems that this debt relief legislation, like many that come from Congress, is just a bother that is wasting the time of everyone involved and helping no one.