Apr. 5, 2005 – With bankruptcy reform legislation on the fast track to becoming law later this year, consumer advocates are issuing new warnings about abusive lenders and fake nonprofit credit counseling and debt management firms.
The bankruptcy reform bill has already passed the Senate and is expected to easily pass through the House of Representatives. The legislation is heavily backed by the credit industry, which spent more than $40 million on political fundraising and lobbying for the changes. But the proposed reforms have come under fire from consumer protection and industry watchdog groups. Most publicized are concerns that the legislation will make it harder for indebted individuals to find real debt relief through bankruptcy protection by requiring many debtors to file for bankruptcy under Chapter 13, in which the debtor is required to set up a repayment plan; instead of Chapter 7, in which some assets are seized, but debts are erased.
But a less talked about provision of the bill would require people seeking bankruptcy protection to first seek credit counseling, a prerequisite widely seen by consumer advocate groups as an opportunity for the debt counseling industry to profit off people in desperate financial circumstances.
"Weâ€™re concerned that this is basically giving carte blanche to an entire for-profit industry," said Linda Sherry, spokesperson for Consumer Action, a nonprofit consumer advocacy organization.
Some nonprofit credit agencies serve as front companies for for-profit debt management programs, directing debtors into expensive debt restructuring plans that make the company money but oftentimes force the debtor into deeper, longer term debt.
The bill would require that anyone seeking to file for bankruptcy first obtain a credit briefing from a nonprofit agency. In it, they would be told about available credit counseling and receive assistance performing a budget analysis. Then, in a second phase of counseling, before debt could be discharged, the individual would have to go through an instructional course, which can be provided by a nonprofit or a for-profit agency.
Consumer advocates fear that the credit counseling will steer indebted individuals into debt repayment programs, some of which have been shown to put financially strapped people into worse financial situations.
While many credit counseling agencies provide authentic services to people who are in debt, others are heavily biased toward providing debt consolidation plans, benefiting as they do financially from the arrangement. Through these plans debtors send one payment each month to the credit counseling agency which then divides the money among the creditors.
In a groundbreaking report on the credit counseling industry, the National Consumer Law Center (NCLC) and the Consumer Federation of America found in 2003 that credit counseling agencies "often harm debtors with improper advice, deceptive practices, excessive fees and abuse of their nonprofit status." The researchers were careful to point out that some agencies had pioneered new, more consumer-friendly practices, but as a "new generation of credit counseling agencies has gained market share, consumer complaints have risen sharply."
"Aggressive firms masquerading as â€˜nonprofit organizationsâ€™ are gouging consumers," said Deanne Loonin, staff attorney for the NCLC, in a press statement about the report. "Deceptive practices and outright scams are on the rise. More consumers are getting bad advice and access to fewer real counseling options."
Consumer advocates say it is bad enough that the bill does nothing to protect consumers against predatory lenders and faux non-profits, but they also fear that the bill will actually push people into economic relationships with those types of agencies.
"In our opinion, itâ€™s going to create a whole new industry based on taking advantage of the people who can least afford it," said Sherry in an interview with The NewStandard. "Consumers will call what they think is a non-profit, and instead get steered into a debt management program run by a for-profit affiliate."
Travis Plunkett, a spokesperson for the Consumer Federation of America, echoed that sentiment. "Thereâ€™s no money to be made in the debt educating and counseling business if youâ€™re actually doing educating and counseling," Plunkett said. "Thereâ€™s only money to be made in debt management," referring to the controversial credit card debt consolidation plans.
Plunkett pointed out that the Federal Trade Commission and Internal Revenue Service have been actively investigating the credit counseling industry for the last several years and have found numerous instances in which nonprofit credit agencies actually serve as front companies for for-profit debt management programs, directing debtors into expensive debt restructuring plans that make the company money but oftentimes force the debtor into deeper, longer term debt.
Last Thursday, the Commission announced it had settled several cases in which companies had done just that. According to the settlement announcement, the companies will pay more than $6 million combined for violating laws regulating the nonprofit financial services industry.
Consumer advocates are also concerned that the legislation allows telephone and internet marketing mediums of choice for predatory lenders and abusive debt consolidation programs and the best for minimizing or bypassing time requirements. In addition to aiding such consumer scams, in Sherryâ€™s opinion, the legislation actually undermines the whole concept of consumer counseling. For-profit companies offering credit counseling rarely provide the sort of comprehensive, long-term service consumer advocacy organizations feel credit counselors should, she said.
"There is a certain time requirement credit counseling demands, and weâ€™re worried that this legislation undermines that," Sherry said. "If the bill remains as-is, the counseling requirement is bound to become cursory; itâ€™s not going to provide the sort of lifestyle-changing service credit counseling should have."
Under the bill, the regulation of non-profit credit counseling agencies will be the responsibility of the United States Trustee Program, the branch of the Justice Department responsible for overseeing bankruptcy law. The Trusteesâ€™ budget has increased about five percent from last year; from nearly $167 million to almost $175 million, according to publicly available information, many question whether the agency has the resources and ability to effectively police the world of credit counseling.
"Not to knock the Trustees, but the credit counseling industry is under a lot of scrutiny these days," Plunkett said. "The Trustees are required by the law to be right 100 percent of the time. What expert is ever right all the time? We donâ€™t think the US Trustees have the experience or resources to do this right every time."
US Trustees Program spokesperson Jane Limprecht declined to respond to questions from TNS about the effect bankruptcy legislation will have on the agency, saying, "Here at the US Trustee Program we donâ€™t comment on pending cases or pending legislation."
Bills to reform the bankruptcy industry have been before the legislature several times in the past eight years. The Senate passed their version of the current legislation in early March and the House version is now in the Financial Services and Judicial committees. Observers expect a final version early this month.
With the billâ€™s passage almost guaranteed before the end of April and the presidentâ€™s approval virtually assured, an unlikely ally has joined consumer advocates: the credit counseling industry itself. In a March 18 plea, the American Association of Debt Management Organizations (AADMO), an industry-supported group committed to ensuring the longevity of companies offering credit counseling and debt management programs alike, virtually begged Congress for stronger regulatory language.
"This legislation starts to set the standard for what makes a good credit counseling agency," AADMO executive director Mark Guimond said in the statement. "Congress needs to look beyond only consumers in bankruptcy and address all consumers facing financial distress. It's inconsistent for the Congress to say that one class of consumers deserves federal protections in credit counseling but others are left high and dry. By virtue of the bankruptcy reform legislation, Congress is saying credit counseling is a federal issue -- an interstate issue. Let's take this opportunity to develop standards for practice, performance and consumer protection. The patchwork of state laws is complex, ineffective and contradictory. Congress has the vehicle for positive change right in their hands."