Law Could Hurt Counseling Agencies

Proposed Law Requiring Credit Counseling Could Hurt Agencies, Group Says
Monday June 11, 10:05 pm Eastern Time By MARCY GORDON AP Business Writer WASHINGTON (AP) -- A proposed law requiring consumers to receive credit counseling before filing for bankruptcy protection could strain counseling agencies already pinched by reduced funding from lenders, a consumer group says. Officials of Consumers Union said Monday that the credit counseling industry, which handled some 3 million indebted consumers last year, may not be up to the task of aiding an additional 1 million or so who could seek help under the bankruptcy legislation before Congress. ``It's really an industry in crisis,'' said Marlys Harris, who researched credit counseling agencies for an article in the July issue of Consumer Reports magazine, published by the group. The agencies vary widely in quality and some deceive consumers and charge excessive fees, Harris said in a telephone conference call with reporters. She advised consumers to shop carefully for a credit counseling agency. They offer debt-management programs, in which counselors work with consumers and their creditors to come up with a repayment plan for the full amounts owed. Consumers agree to cut up their credit cards, not to take out any new credit and to make a monthly payment to the counseling agency, which distributes it to creditors. In return, consumers may get reduced interest rates from creditors and a break on fees. Consumers Union is concerned because the banks, retailers and other credit card issuers that fund the counseling agencies -- returning a portion of the money collected from consumers in debt-management plans -- have reduced their contributions in recent years. At the same time, the number of people seeking credit counseling has grown. The banking industry defends the cuts as necessary cost-cutting and as a way to force the credit counseling industry to become more efficient and curb abuse by some consumers. ``Banks have tightened their belts,'' said Catherine Pulley, a spokeswoman for the American Bankers Association. Still, she added, ``Credit counseling services are there for people who truly need them.'' Because of the shrinking funding, many counseling agencies that belong to the National Foundation for Credit Counseling have had to begin charging consumers nominal fees, noted Durant Abernethy, the group's president. Some programs remain free to consumers, however. The foundation, with 1,468 member counseling agencies, is the largest group, followed by the Association of Independent Consumer Credit Counseling Agencies, according to Harris. Newer agencies that belong to neither group, aren't subject to certification standards and don't receive industry funding, sometimes charge huge fees and some only deal with clients over the telephone, she said. The bankruptcy legislation, which would make it harder for people to erase credit-card and other debts under court protection, has been stalled in Congress for months. Similar versions cleared the House and Senate but final passage had been held up partly by the 50-50 party split in the Senate. That split recently changed in favor of the Democrats because of Republican Sen. James Jeffords of Vermont's decision to become an independent, but prospects for the legislation remain unclear. By requiring debt-laden consumers to see a credit counselor before filing for bankruptcy protection, the authors of the legislation sought to make people think twice before taking that step. Counselors often tell consumers of the potential consequences of bankruptcy, such as the forced sale of some assets to pay creditors and the impact on credit ratings. The provision requiring credit counseling was put into the legislation ``for all the wrong reasons,'' Frank Torres, Consumers Union's legislative counsel, said during Monday's conference call. Policymakers should focus instead on strengthening credit counseling and ensuring it is affordable, he suggested. The average person in a debt-management plan with a counseling agency has a yearly income of $25,000 to $30,000, a college education and total debts -- excluding mortgage or rent and car payments -- of around $16,000. In 1998, about 504,000 people with total debts of $2.3 billion got into debt-management programs at counseling agencies that belong to the National Foundation for Consumer Credit.

Proposed Law Requiring Credit Counseling Could Hurt Agencies, Group Says

Monday June 11, 10:05 pm Eastern Time

By MARCY GORDON
AP Business Writer

WASHINGTON (AP) -- A proposed law requiring consumers to receive credit counseling before filing for bankruptcy protection could strain counseling agencies already pinched by reduced funding from lenders, a consumer group says.

Officials of Consumers Union said Monday that the credit counseling industry, which handled some 3 million indebted consumers last year, may not be up to the task of aiding an additional 1 million or so who could seek help under the bankruptcy legislation before Congress.

``It's really an industry in crisis,'' said Marlys Harris, who researched credit counseling agencies for an article in the July issue of Consumer Reports magazine, published by the group.

The agencies vary widely in quality and some deceive consumers and charge excessive fees, Harris said in a telephone conference call with reporters. She advised consumers to shop carefully for a credit counseling agency.

They offer debt-management programs, in which counselors work with consumers and their creditors to come up with a repayment plan for the full amounts owed. Consumers agree to cut up their credit cards, not to take out any new credit and to make a monthly payment to the counseling agency, which distributes it to creditors.

In return, consumers may get reduced interest rates from creditors and a break on fees.

Consumers Union is concerned because the banks, retailers and other credit card issuers that fund the counseling agencies -- returning a portion of the money collected from consumers in debt-management plans -- have reduced their contributions in recent years. At the same time, the number of people seeking credit counseling has grown.

The banking industry defends the cuts as necessary cost-cutting and as a way to force the credit counseling industry to become more efficient and curb abuse by some consumers.

``Banks have tightened their belts,'' said Catherine Pulley, a spokeswoman for the American Bankers Association. Still, she added, ``Credit counseling services are there for people who truly need them.''

Because of the shrinking funding, many counseling agencies that belong to the National Foundation for Credit Counseling have had to begin charging consumers nominal fees, noted Durant Abernethy, the group's president. Some programs remain free to consumers, however.

The foundation, with 1,468 member counseling agencies, is the largest group, followed by the Association of Independent Consumer Credit Counseling Agencies, according to Harris. Newer agencies that belong to neither group, aren't subject to certification standards and don't receive industry funding, sometimes charge huge fees and some only deal with clients over the telephone, she said.

The bankruptcy legislation, which would make it harder for people to erase credit-card and other debts under court protection, has been stalled in Congress for months. Similar versions cleared the House and Senate but final passage had been held up partly by the 50-50 party split in the Senate. That split recently changed in favor of the Democrats because of Republican Sen. James Jeffords of Vermont's decision to become an independent, but prospects for the legislation remain unclear.

By requiring debt-laden consumers to see a credit counselor before filing for bankruptcy protection, the authors of the legislation sought to make people think twice before taking that step. Counselors often tell consumers of the potential consequences of bankruptcy, such as the forced sale of some assets to pay creditors and the impact on credit ratings.

The provision requiring credit counseling was put into the legislation ``for all the wrong reasons,'' Frank Torres, Consumers Union's legislative counsel, said during Monday's conference call. Policymakers should focus instead on strengthening credit counseling and ensuring it is affordable, he suggested.

The average person in a debt-management plan with a counseling agency has a yearly income of $25,000 to $30,000, a college education and total debts -- excluding mortgage or rent and car payments -- of around $16,000.

In 1998, about 504,000 people with total debts of $2.3 billion got into debt-management programs at counseling agencies that belong to the National Foundation for Consumer Credit.