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| The Basics | How to pick a $50 credit counselor
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The new bankruptcy law requires a stop at a credit counselor first. Make sure you dont settle for drive-by advice.
By Liz Pulliam Weston
Soon, debt-laden consumers seeking credit counseling will have one more decision to make: whether to seek out the real thing or settle for a "traffic school" version that will allow them to file for bankruptcy.
Experts predict a fleet of counselors will spring up to meet demand from the roughly 1.5 million Americans who, starting Oct. 17, will be required to complete 90 minutes of credit counseling before they can file for bankruptcy. That's on top of the 3 million or so people who contact credit counselors annually now, hoping for help with their finances or enrollment in debt-management plans to avoid bankruptcy.
The U.S. Department of Justice, which drafted the guidelines for implementing this aspect of bankruptcy reform, has already received more than 1,000 applications from agencies wanting to provide this counseling, for which they will be allowed to charge up to $50 a person.
The Justice Department says the sessions must include:- An analysis of the client's current financial condition (translated: how deep a hole you're in);
- A discussion of the factors that caused this condition (translated: what got you into the hole in the first place);
- Guidance on developing a plan to respond to the problems without incurring negative amortization of debt (translated, near as I can figure: how to keep the hole from getting deeper);
- A discussion of all alternatives for dealing with the situation (translated: paying your debts, not paying your debts, paying some but not all of your debts, filing for bankruptcy).
$50 x 1.5 million filers = major money
Agencies that want to offer this counseling must be organized as nonprofits. But nothing prevents them from seeing the surge of potential clients as one heck of a business opportunity.
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"Fifty bucks times 1.5 million people," noted Sam Gerdano, head of the nonpartisan American Bankruptcy Institute, "is a lot of money."
The economics of credit counseling make it likely many of these providers will offer large group sessions, telephone counseling and consultations via the Internet rather than the face-to-face sessions offered by traditional credit-counseling agencies, Gerdano said.
Hence the comparison to traffic schools, where those who want a traffic ticket erased for insurance purposes spend a few hours in a huge classroom or in front of a computer. People who pay attention might learn a thing or two, but it's questionable whether the experience makes them better drivers.
The pending credit-counseling situation disturbs many consumer advocates and the old-school credit counselors, who emphasize personalized counseling and want to continue doing so (and who, of course, will be competing with the new breed of mass-audience counselors).
"The intent of the (bankruptcy reform) legislation is to change consumers' attitudes and behaviors," said Susan Keating, president and CEO of the nonprofit National Foundation for Credit Counseling,
the oldest organization of credit-counseling agencies. "If the result is drive-by counseling and education, we will not have fulfilled the intent of this particular legislation."
Keating acknowledges, though, that $50 won't cover the costs of providing one-on-one sessions for the new influx of bankruptcy hopefuls. Currently, most NFCC agency budgets come from a share of the money that clients pay to credit card companies and other lenders through debt-repayment programs.
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