The new bankruptcy law imposes two requirements on anyone seeking to reduce or eliminate debt through the courts. To file for Chapter 7 or Chapter 13 on or after Oct. 17, you must have had a credit-counseling briefing within the prior six months. Once you file, you can't walk away from debts without first completing an instructional course on personal financial management.
The provisions are intended to curb bankruptcies by helping people work out a plan to pay back what they owe and better manage their finances. But the rules will send hundreds of thousands of people into a minefield where legitimate counseling agencies do business alongside unsavory players.
After a year-long probe, the Senate Permanent Subcommittee on Investigations reported in April that the counseling business is rife with excessive fees, deceptive practices, and poor advice. The Internal Revenue Service is auditing more than 50 credit-counseling agencies suspected of abusing their tax-exempt status by steering clients into debt-management plans that charge high fees. "In this industry the good players are the exception, not the rule," says Eric Friedman, chief of the Montgomery County (Md.) Consumer Affairs Div.
Legitimate counseling agencies cover their costs by taking a portion of funds they collect when they set up debt-management plans. The agency negotiates reduced balances and interest rates with each of a client's creditors and typically gets 12% to 15% of the payments received. But some agencies may be charging debtors steep fees labeled "voluntary contributions" or steering consumers to affiliated for-profit companies that make debt-consolidation or home-equity loans.
Sorting out the good guys from the bad will be the job of the Justice Dept.'s U.S. Trustee Program office. Bankruptcy-court clerks around the country will keep public lists of nonprofit agencies and financial-ed courses certified by the U.S. Trustee. That information also will eventually be available at www.usdoj.gov/ust.
Until the U.S. Trustee publishes its lists, though, you're on your own. To avoid getting burned, here are some steps you can take to make sure the credit counselor you use is above-board:
Check the agency's track record. Call the Better Business Bureau to see if there's any history of complaints. Consumer groups advise sticking with agencies that are members of the National Foundation for Credit Counseling. The NFCC has mandatory membership standards that require agencies to be licensed, bonded, and insured, and to have annual audits of operating and trust accounts. Accredited agencies are reviewed every four years.
Focus on fees. NFCC agencies charge an average of $15 for credit counseling, but many offer it free. Fees for a debt-management plan should run no more than $50 up front and $25 a month thereafter.
Watch for warning signs. Walk out of any agency that offers you a debt-management plan within 20 minutes. Hang up the phone if the conversation starts with a query about your credit-card debt. These are red flags that suggest the agency is more interested in signing you up for services that boost its finances than it is in seriously analyzing yours.
By Amy Borrus