Trying to get out from under your debts just got harder.
That’s because the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect Oct. 17.
It’s the first overhaul of bankruptcy laws in 27 years, making it tougher for consumers to file for bankruptcy to wipe out their debts.
Instead, more debtors will have to work out repayment plans with creditors.
They’ll also have to undergo credit counseling before they file for bankruptcy. The counseling is supposed to teach them about the bankruptcy process, alternatives to bankruptcy, how they got themselves into their financial dilemmas and how to ensure that they don’t repeat mistakes.
There are differences of opinion about how helpful the counseling will be.
“The credit-counseling provision is one of the best things about it, because it helps people to get their feet on the ground and to get an understanding of what went wrong and what they can do to adjust for the future,” said Steve Bartlett, chief executive of the Financial Services Roundtable, which represents financial services companies.
Too little, too late
But consumer advocates who opposed toughening the bankruptcy law say the required counseling doesn’t come at the right time.
“We support credit counseling, especially if it’s delivered early, and this is not early intervention,” said Travis Plunkett, legislative director at the Consumer Federation of America. “This is late intervention at the point where people have decided that bankruptcy is the only way for them. We just wonder whether this kind of late intervention will be helpful to too many people.”
To some, the credit counseling that consumers must get before they file for bankruptcy represents a tool to help people make a new start. To others, it’s an unnecessary hurdle.
“One of the main objectives is to make them successful from this point forward, whether they file or not,” said Betty Parker, housing coordinator and credit counselor at Consumer Credit Counseling Service of North Central Texas, one of the agencies approved by the government to provide the counseling.
That’s in keeping with the belief that “if you give a man a fish, you feed him for a moment, but if you teach him how to fish, you feed him for a lifetime,” she said.
Jumping through hoops?
But other experts say the counseling’s timing is all wrong.
“I question what they are going to take away from the briefing portion,” said Howard Dvorkin, founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla., which is awaiting government approval to provide bankruptcy counseling. “They’re there just to jump through the hoop to file for bankruptcy. They’re not there because they want to be there.”
There are two parts to the credit counseling.
The first is the “prefiling” session during which the credit counselor will go over the client’s income, assets, liabilities and expenditures.
“We’ll go over the qualifications of filing for bankruptcy and the difference between Chapter 7 and Chapter 13, the means test, the advantages and disadvantages, the pitfalls of filing, what’s exempt and nonexempt,” Parker said.
Participants will receive a certificate from the credit-counseling agency describing the services provided. Only agencies approved by the government will be able to provide the certificate, which must be filed with a debtor’s bankruptcy petition.
What it costs, what you get
The counseling must take place within six months before a debtor files for bankruptcy and must be given by an agency approved by the U.S. Trustee Program, an arm of the Justice Department that administers bankruptcy laws.
The cost of the credit counseling must be a “reasonable fee.”
“The U.S. Trustee Program has not set a dollar amount for what constitutes a reasonable fee,” the office said on its Web site. “Based on the information provided by the industry, we believe this service generally will be available for a fee ranging from free to $50.”
The second counseling session is what’s called the “predischarge session,” which takes place after the debtor has filed for bankruptcy.
During that session the debtor will be taught money-management skills.
The new bankruptcy law is bringing more business to the rapidly growing debt-services industry at a tough time.
Government regulators and state legislatures have been targeting companies that have engaged in abusive practices and falsely promised relief from debts.
Ultimately the goal of the initial round of counseling is to make sure consumers understand the negative aspects of filing for bankruptcy – that it hurts everything from their credit records to their chances of getting a job – and understand other options.
Those options include making lifestyle changes to cut spending, borrowing from family or friends, or liquidating assets, said Stanley of Money Management International.
Another option may be going into a debt-management program in which the credit-counseling agency negotiates with creditors for lower interest rates and a reduction or waiver of fees in exchange for a steady repayment.
plan. The debtor would make one monthly payment to the counseling agency, which in turn pays the creditors.
A debt-management program typically lasts three to five years.
“If your credit card bills are completely out of control and far beyond your ability to afford them, then the relatively minor breaks that credit card companies offer to people in credit counseling may not provide enough breathing room for some people to afford a three- to five-year debt-management plan,” Plunkett said.
Credit counselors say there are cases where bankruptcy is the best option.
“Sometimes, they’ve spent themselves into a position where they’re just not going to be able to pay it back, even if they work two jobs,” Stanley said. “I anticipate those people will be worse off because they’ve already gone through the mental process and are saying, “I’m not going to be able to pay this.”‘
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