Credit Counseling Services
What are Credit Counseling Services?
A "Credit Counseling Service" is an organization that exists and functions to serve debtors and their creditors by attempting to resolve debts through individual debt repayment plans.
The credit counseling service seeks, when possible, reduction of the amount of debt and reduction or elimination of fees and charges accrued on the debtor's accounts.
Demand for Credit Counceling Services
As our society reached new levels of personal indebtedness, credit counseling services began to spring up everywhere. Today, there are approximately 1,450 credit counseling services currently operating in the United States. As demand for debt help grew, self-governing associations were formed that set minimum standards of conduct for credit counselors.
Initially the system worked well but with the pressure of a burgeoning marketplace and an influx in the companies offering credit counseling services, problems began to occur.
Testimony before the House Ways and Means Committee Subcommittee on Oversight regarding: Non-Profit Credit Counseling Organizations.
Non-Profit Credit Counseling Organizations
SUMMARY OF PROBLEMS WITH CREDIT COUNSELING
The credit counseling industry was born in the mid-1960's to provide credit card companies a creative opportunity to recover overdue debts. Creditors created the industry and provided the bulk of the funding needed to keep the agencies in business. At first, most of the agencies were affiliated with the National Foundation for Credit Counseling (NFCC), a national trade organization that prescribes various standards for member organizations.
From the outset, debt management plans (DMPs) were the feature service. Through these plans, a consumer sends the agency a lump sum, which the agency then distributes to credit card companies that the consumer owes money. In return, the consumer is supposed to get a break in the form of creditor agreement to waive fees owed, to eliminate all references to delinquent payments on the consumer's credit reports by re-aging the account, and, and in some cases, to lower interest rates. Consumers also gain the convenience of making only one payment to the agency rather than having to deal with multiple creditors on their own. Through the "Fair Share" contribution, creditors voluntarily return to the agency a set percentage of the funds that are disbursed to them.
Debt Management Plans
Debt management plans include unsecured debt only. This is a critical issue because consumers with sparse resources should generally prioritize secured debt, such as home and car loans, over unsecured debt. In addition, DMPs may not even include all unsecured debt.
NCLC and CFA have found that in the last decade, the credit counseling industry has undergone an alarming transformation. Consumer demand for credit counseling has grown, funding to agencies has been sharply reduced, and an aggressive new class of credit counseling agencies has emerged. This new generation has brought some advances, such as flexible hours, electronic payments and easy access to counselors by phone and the Internet. Unfortunately, however, complaints about deceptive practices, improper advice, excessive fees and abuse of non-profit status have grown significantly as this new generation of credit counseling agencies has gained market share.
Key problems highlighted in the NCLC/CFA report include:
- Deceptive and Misleading Practices: Among other problems, we described agencies that do not pay consumers' DMP payments on time, that deceptively claim that fees are voluntary, and that do not adequately disclose fees. In many cases, agencies deceptively exaggerate the types of concessions they can get from creditors to get people out of debt.
- Excessive Costs: As creditors have reduced funding, some reasonable fee increases are to be expected. However, in an industry that rarely charged for counseling and other services a decade ago, the vast majority of agencies now charge fees for services. At least a few agencies charge as much as a full month's consolidated payment simply to establish an account. Monthly DMP fees and costs for non-DMP services are also growing.
- Abuses in Non-Profit Status: This is the focus of our testimony today. The reality is that non-profit agencies are increasingly performing like profit-making enterprises. Many agencies aggressively advertise and sell debt management plans and a range of related services. The multi-service counseling, education, and debt management plan provider is becoming the exception rather than the norm.
- Decline in Consumer Education and Counseling Options: Consumer educational services are rapidly declining. Many agencies that claim to provide education and/or counseling merely sell slickly produced, but unhelpful, CD ROMs, videos or internet information. For example, our survey of agencies not affiliated with the National Foundation for Credit Counseling (NFCC) found that only five of the forty agencies surveyed offered services unrelated to DMPs. Among this minority of agencies, four out of five charged for these other services, including books and videos on debt problems.
The Federal Trade Commission stepped into the fray publishing their views of the industry and offering standards that would ensure that the consumer only engages the services of a legitimate credit counselor. Read transcript
Bankruptcy Abuse Prevention Bill
In an effort to set Federal Standards for the credit counseling industry, a new bill was written into law. The new bill became known as the Bankruptcy Abuse Prevention Bill. Among the 25 Bankruptcy Code changes was the requirement for any person wishing to file for bankruptcy to complete a credit counseling course.
See the New Bankruptcy Law Relating to Means Test for Chapter 7 Eligibility.
Ms. Sue Ann Slates, Attorney, Executive Office for United States Trustees, wrote an insightful paper on How Credit Counseling Services Operate and how the New Bankruptcy Law will impact debtors and creditors alike.
Pre-Bankruptcy Filing
The pre-bankruptcy filing requirement of credit counseling is a new concept in bankruptcy law, creating new responsibilities for debtors and United States Trustees. Under the law, credit counseling services have, in effect, become the "gatekeepers" of the bankruptcy system because individuals are ineligible to file for bankruptcy unless they first obtained a certificate from a credit counseling service approved by a United States Trustee.
The United States Trustee Program is working to ensure that debtors are referred to Credit Counseling Services that are dependable, responsible, skilled in their work, and responsive to both debtors and creditors. The goal will be to design a system that ensures that the counselors who are approved will function with ongoing integrity and success. With that goal in mind, a system can be structured that fulfills the intent of Congress and the needs of debtors, creditors, the bankruptcy courts, the United States Trustees, and all parties interested in the bankruptcy process.
Locate a Trustee Approved Certified Credit Counselor in your State.
