Bankruptcy Counseling Law Doesn't Deter Filings

During congressional debate, many critics of the old law suggested that bankruptcy protection was being used as a cover by spendthrifts who might be able to repay their debts with a little more discipline.

But credit counselors say that is not the type of debtor they have been seeing.

As of Jan. 1, the Consumer Credit Counseling Service of Greater Atlanta had conducted 12,539 sessions nationwide. "Our experience has been that virtually none of these people really qualified" for anything other than bankruptcy protection, said President Suzanne Boas.

At the far smaller Consumer Credit and Budget Counseling in Southern New Jersey, 112 people had sought pre-bankruptcy counseling as of the beginning of January. "None at this point have signed up for a debt-management plan," said Executive Director Russell Graves. Instead, they got the required certificates confirming they had counseling and giving them the green light to file for bankruptcy protection.

Graves said that so far, his counselors have seen people "with true hardships," such as lost jobs or disabilities that cut their income. "We have yet to see anybody who charged up their debts, used cash advances" and abused their credit, probably because those kinds of debtors filed before the new law took effect, he said.

In many cases, debtors are in such financial distress that they cannot even afford the counseling fee, which ranges from $20 to $75, depending on the agency. Graves's New Jersey group has reduced its fees ($50 for an individual, $60 for a couple) half the time and waived them in 10 cases. MMI has waived fees in 60 percent of its cases, Hand said.

The pre-bankruptcy credit-counseling requirement was initiated by Sen. Jeff Sessions (R-Ala.) during the 10-year battle to enact a new law. He said in a recent interview that it was "disappointing" to learn that so few consumers have signed up for a debt-management plan. He said he intends to monitor the law's progress and was "not prepared to give up on this."

Neither is the financial industry. The consumers filing now are "the poorest of the poor . . . not a fully representative sample of the filers," said Philip S. Corwin, the American Bankers Association's bankruptcy expert.

Industry officials say that even if the debtors turn out to be a typical sample, they will benefit from the financial education given by credit counselors. "We strongly believe that an informed consumer is a better consumer," said Steve Bartlett, president of the Financial Services Roundtable, a trade association of the largest consumer credit and finance companies.

Credit-counseling executives expect the number of bankruptcy filings to pick up in the next few months, the traditional peak period for credit counseling, as families cope with increased energy prices, higher interest rates and a new federally mandated policy that boosts the minimum amount due on monthly credit card bills.

Fewer debtors than expected are seeking face-to-face consultations, preferring to phone call centers like the one where Cameron patiently and sympathetically sifted through each caller's financial details. MMI allowed a reporter to sit in on these sessions on the condition the debtors' privacy would be protected.

"Can you give me some background about how you got in these circumstances?" Cameron asked the Colorado couple with an imminent foreclosure.

The wife quickly explained: Shortly after they bought their house, someone fraudulently withdrew money from their bank account. They fell two months behind and "it just snowballed from there." She was injured at work, then lost her job.

"Put it all together, you've had quite a time of it," Cameron said, as she walked the couple through several possibilities, but concluded none was realistic.

"Bankruptcy," she said, "is about the only option."