Bankruptcy Counseling Law Doesn't Deter Filings
Tuesday, January 17, 2006
Three months after a new bankruptcy law took effect, the overwhelming majority of debtors seen by credit counseling agencies are filing for bankruptcy instead of using repayment plans envisioned by the law's supporters.
The law requires debtors to see credit counselors before they file for bankruptcy protection. It is a prerequisite that banks and credit card issuers hoped would steer consumers away from bankruptcy court and into plans that would allow them to repay debts over a few years.
But so far, that is not happening.
The counseling agencies say most debtors are in such deep financial trouble that they cannot qualify for a debt-management plan.
"Typically, consumers are too far gone when they get to us," said Ivan L. Hand Jr., president and chief executive of Money Management International Inc. (MMI), the nation's largest credit-counseling organization.
That was true during an afternoon spent with MMI credit counselor Lynn Cameron as she advised consumers from a small, gray cubicle in a 150-operator call center in Phoenix last month.
"Bankruptcy is about the only option," Cameron told a Colorado couple whose home was about to be foreclosed upon.
"It doesn't look like you have any alternative at this point," she said on her next call -- with a Maryland family of four with more than $59,000 in credit card debt.
"Bankruptcy looks like a very good option," she repeated an hour later to a disabled 60-year-old with no income and no assets but lots of debts.
In the first 13 weeks after the new law took effect Oct. 17, only 4.5 percent of the 14,907 debtors counseled by MMI had sufficient income to be considered for a plan to pay back debts over a few years. Of those 669 debtors, only 42 have signed up so far for such a debt-management plan.
Financial industry executives, who had pushed for the new law to reduce the record number of bankruptcy cases, say it is too early to tell how well the new credit-counseling requirement is working -- especially because so many consumers rushed to file under the old, less-restrictive law. In the two weeks before the new law took effect, more than 600,000 debtors filed for protection from creditors.
Previously, filings had averaged about 30,000 a week. The number dropped to about 3,600 a week right after the new law took effect, but is now about 5,000 a week and is expected to climb as holiday bills come due.