Consumer Reports: Credit counseling agencies would be `overwhelmed' with new clients if bankruptcy reform bill passes

YONKERS, N.Y. – If the pending bankruptcy abuse reform bill that would require those who are considering filing for bankruptcy to seek out debt management counselors passes, it may overwhelm “underfunded” consumer credit counseling agencies, Consumer Reports magazine said in a June 11 audio conference. Last year, an estimated 3 million borrowers sought out consumer credit counseling agencies, said Marlys Harris, the finance writer who wrote the article that will appear in the July 2001 issue of the publication. It is anticipated that within a year passage, the number of people using such services could increase by one-third. Harris found that some of the agencies are “uneven in quality and they are chronically underfunded by the creditors who finance their services.” Likewise, the federal government currently does not regulate counseling agencies although the pending legislation has set standards that all agencies must meet to ensure debtors receive high-quality counseling. On the flip side, creditors have reaped the benefits of people using credit-counseling agencies, with $2.5 billion recovered through debt-repayment plans last year. Still, in 1999, the National Foundation for Credit Counseling, the creditor group that has a network of 1,300 agencies, reported that just 21% of its 273,473 cases successfully completed a debt management plan, Harris discovered. Another 21% decided to administer their own payback plans. And, while just 4% filed for bankruptcy, 47% simply stopped paying and were never heard from again. For some credit unions, the impact of a bankruptcy filing has had an enormous effect on the bottom line and member services. When a person filed four years ago while a member at Falls Federal Credit Union in Hoosick Falls, NY, the manager, Gail Isles, had to lower dividend rates, which caused some members with more than $6,000 in deposits to close their accounts. “We’re talking about those members who have invested their money in savings accounts,” Isles explained. “When they left, I had to increase loan rates which led to a decrease in the amount of loans secured which led to not having any of that savings money to invest elsewhere because we just didn’t have it.” Isles also had to close the credit union one-day a week and cut both full-time employees’ hours to part-time status. Last year, thanks to the “core group of members, who are everyday, hard working people,” the credit union, which has 1,054 members and $2.5 million in assets, got fiscally back on track. “I’ve sat through bankruptcy cases in court and I’ve seen the doctors who make more than $200,000 a year but refuse to pay off their debt,” Isles said. “The woman whose husband just died and has no money, is a different story. Bankruptcy should never be the first choice, but it’s so rampant that something has to be done.” The Credit Union National Association has wholeheartedly endorsed the bankruptcy reform bill, which has passed both the House and the Senate and is awaiting President Bush’s signature. “Now more than ever, it is crucial that credit unions have well-trained staff who can educate and work with members in financial trouble,” says Mike Miller, vice president of CUNA’s Center for Professional Development. “The goal of our collections and credit counseling schools is to show you how to take what is likely a very difficult time in your members’ lives and turn it into a positive experience.” Meanwhile, Consumers Union, the advocacy group that publishes Consumer Reports, is recommending that Congress provide resources for federal and credit counseling agencies to do the job required by the proposed legislation. Also, states need to beef up oversight to ensure that consumers’ money is safe and that agencies refrain from “sideline businesses that sell consumers more debt.” Only 17 states now regulate credit-counseling agencies. Consumers Union is also asking for more flexibility from creditors in what they demand from those who need debt relief and that counseling agencies have more skilled counselors. With personal bankruptcies expected to exceed the 1.4 million mark this year, Frank Torres, Consumers Union’s legislative counsel, said “consumers must exercise more caution using credit.” The industry standard for determining out-of-hand debt, Torres said, is if total debt payments, excluding mortgage and car are between 25 and 50% of after-tax annual income, the borrower should consult a counseling agency right away. -