What Effect Will the New Bankruptcy Law Have on the Credit Counseling Industry?
Written by Mike Killian
Posted On: October 17, 2005
The new bankruptcy law, which went into effect today, requires pre/post counseling. Will this requirement result in a new crop of counseling agencies springing up everywhere? I was surprised to discover otherwise. I was even more surprised to learn why.
Realizing there would be a great need for consumer assistance with the new law, last spring I explored how to go about offering counseling myself. As part of the Justice Department, the US Trustee Program is the assigned federal overseer. It seems the first step to offer counseling is to be a non-profit entity. I do not understand why especially in light of the article Is Non Profit Status Marketing Hype. But from the Justice Department I also learned a counselor must be "accredited or certified by the National Foundation for Credit Counseling (NFCC) or Association of Independent Consumer Credit Counseling Agency... or acceptable to the US Justice Department." NFCC informed me the only way to be accredited by NFCC is to be one of their members. I was also told by another source that accreditation by such groups as the Council On Accreditation (COA) can cost in excess of $10,000.
Besides questioning the "insider" ramifications of the above, I asked two different sources two additional questions: 1- Are you aware of any increases in counseling organizations in anticipation of the new law? 2- Is it possible the new law may actually hurt the business of counseling organizations?
Jim Young, 8 year veteran CEO of debt management firm Accelerated Debt Consolidation said:
I have not heard of any new agencies springing up in anticipation of the new law because it is not like it was 5 years ago. Now the requirements to become an approved source with all of the creditors is much more involved. However, this does open the door for a lot of lead generation companies posing as debt management companies and of course you will see TONS of debt negotiation coming out of the woodwork.
I don't see how the bankruptcy law could hurt existing debt management companies. People seeking bankruptcy are not good candidates for debt management because qualified debt management prospects need to be able to afford the monthly payments and if they are already seeking bankruptcy....
EVERYBODY with credit card debt needs to look into legitimate credit counseling services early BEFORE they are maxed out [on their cards].
I also posed the same questions to Scott Bilker, creator of DebtSmart.com and author of Talk Your Way Out of Credit Card Debt. Scott responded,
I'm not aware of any increases. I do wonder, if there is any increase, if that increase is due to existing companies starting new "shell" companies that will qualify as "nonprofit" so they can be recommended by the government.
Could the new law actually hurt counseling organizations? Yes, that's my feeling. The new law forces people to seek credit counseling before being allowed a chapter 7 bankruptcy. The main reason people file for bankruptcy is to get a fresh start--to loose all their debt. They're only going to want a "pass" to get a chapter 7 and therefore, I think, they will not become profitable to these so-called, nonprofit companies.
... [Also] "fair share," the amount they get from the banks for being a voluntary debt collection agency, may get further reduced since banks know that fewer debtors will be able to dismiss their debts.
Given such comments from industry experts, it will be interesting to see what actual effect the new bankruptcy law has on the credit counseling industry. While the effect may or may not be positive, it is safe to say that credit counseling as we have known it will never be the same again.
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Mike Killian is founder of Learning Credit and Debt Management. Mike has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.
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