Friday, February 25, 2011

Harvey Warren, long time debt activist and author of Drop Debt: Surviving Credit Card Hell without Bankruptcy, has been reading the tea leaves of future consumer debt troubles and he doesn't like what he sees. In typical fashion, the recently passed government regulations designed to assist consumer pinched by the economic downturn actually do the exact opposite. This is not surprising, health care reform was not and Schumer-McCaskill Debt Settlement Consumer Protection Act does nothing of the sort.

In the article below Harvey asks a burning question: Is Credit Counseling Dead?



With no end in sight for the skyrocketing foreclosure rates and the prospect of unprecedented heights for gas prices and energy-related purchases, inflation on the horizon, and interest rates all but certain to adjust upwards, can a flood of personal bankruptcies be far behind? The answer is clearly, yes - and the recent bankruptcy numbers tell the tale. The American Bankruptcy Institute reports 1,413,000 filings in 2009 -- a 129 percent increase since bankruptcy filings began to rise in 2006, one year after the new bankruptcy laws were enacted. Where is legitimate non-profit credit counseling in all of this? Is it alive and well and coming to the aid of consumers or dead in the water without a plan?

Credit Counseling is the traditional consumer helper for legitimate debt relief and would seem to be the logical weapon of choice of consumers drowning in debt. Even the pending Schumer-McCaskill Debt Settlement Consumer Protection Act that deputizes the Credit Counseling industry to help consumers work out their debts without bankruptcy misses a critical catch. Credit Counselors can't help – by design. The credit counseling industry, which was fostered by the creditor grantors themselves, is beholden to intransigent creditors pursuing full balance repayment through Debt Management Plans. This one note response to consumer indebtedness is driving into bankruptcy the vast majority of customers who can pay some, but not all of their debt.

Credit counseling may indeed soon be dead if industry leadership and the three trade associations don't immediately crusade for a dramatic change in how they do business.

Credit counseling is currently caught between a rock and hard place as they try to serve consumers by providing them a less than full balance workouts and thereby risk the loss of creditor funding for advocating for payment reductions to benefit those consumers. The glass half-full argument that "something is better than nothing in bankruptcy" is a non-starter with collection departments that see anything less than full repayment as a haircut they do not want to take.

Recent efforts in Utah by the non-profit credit counseling agency AAA Fair Credit Foundation to offer less than full balance programs to consumers were met by swift and intimidating rejections from JP Morgan Chase, Bank of America and other major card issuers. In a moment of courageous advocacy for the consumers' wish to avoid bankruptcy, the creditors response was "we want it all or we will take nothing at all". Put another way, a 40% collection is not good, but 0% in bankruptcy is just fine." Why?

The Pandora's Box theory has long been the fear-driven, dreaded outcome that shapes collection policy on assisting customers who can no longer pay even their minimum payments. It suggests that if the creditors allow some customers off the hook that all customers will soon want to get off the hook.

What is most intriguing about this theory is that is assumes that people are generally dishonest and will cheat the credit grantor given the chance, hence the very rigid and often Draconian collection policies that are driving millions of Americans into bankruptcy. Credit counselors – save a precious few – are unwilling to fight for consumers for fear that their funding will be terminated for not playing ball. If credit counseling cannot advocate for the consumers' desire to pay what they can, how long can credit counseling continue to operate in this economic crisis?

The Utah less than full balance initiative is supported by a wide range of legislative, regulatory and consumer protection authorities because of its reliance on a means test and needs analysis. The premise is simple, in opposition to the Pandora's Box proposition; there is a clearly defined portion of the debt that the consumer can pay monthly even when they can't pay their minimums. The obvious question is "how much is a portion?" The good news is that there is a reliable and safe answer. The bad news is that fear and greed are driving the collection process and preventing credit counselors from delivering the debt relief that is needed immediately by millions of Americans.

The experiment in Utah with AAA Fair Credit Foundation is the result of years of research and development by some of the best minds in the nation on the subject of consumer behavior and credit usage. Dr. Robert D. Manning, author of Credit Card Nation, and frequent expert witness at Congressional hearings on these matters, has developed a reliable assessment tool that credit counselors may use to assess consumer repayment capacity.

The Pandora's Box worries that have emerged in response to the unregulated debt settlement industry have no place in the discussion of an arithmetic analysis in the hands of legitimate non-profit credit counselors. Yet, credit grantors have, for a year, steadfastly resisted this consumer driven solution for reasons unknown despite the fact that consumer advocates, legislators and regulators agree that it is a step in the right direction.

In many places of great need, restrictive state law would make even the low-cost pricing of the program illegal for offering to the public. The pricing for the completed certified "package" of a Debt Resolution Plan is $340, the approximate price of court costs – without attorney's fees – for filing a Chapter 7. Again, this is a plan for the "near bankrupt" who can manage to repay something much like a voluntary Chapter 13, but without the actual filing. Credit counselors will only offer this program to consumers who have failed to qualify for traditional full balance Debt Management Plans. At a time when creditors should be racing to give credit counseling this safe and effective alternative to troubling debt settlement providers, they have instead put the credit counseling industry is in a state of paralysis focused on the potential loss of "fair share" funding for trying to help consumers.

If credit counseling agencies fail to come to the aid of the debt-crushed public what is their role and why are they given tax support through non-profit exemptions in the first place? Those very same exemptions have spawned a regulatory scheme that may be even harder for credit counseling to navigate than the funding conflicts with the creditors themselves.

It is time for federal and state authorities to overhaul the regulations on the credit counseling industry to give it a chance to regain its economic health and ability to deliver essential less than full balance debt relief services. The abuses of the past by huge debt mills like Ameridebt have damaged the credit counseling industry by making overly restrictive rules for the many that should have only been applied to the very few who clearly broke the law.

Further, the National Conference of Commissioners on Uniform State Laws created a template for states to follow that included regulations that were meant to serve the consumer by reining in fees for services. Enacted in July of 2007, before the housing market collapse, it is out of step with what consumes need in this new economy. Creating consumer safeguards that targeted controlling unaccredited, unregulated debt settlement providers that were also applied to highly regulated credit counseling agencies has diminished services to consumers to such an extent that in some states the only out for consumers is bankruptcy.

We can all agree that providing services at low cost to consumers in debt trouble makes sense on its face. However, a deeper look reveals that states with very restrictive fee caps have created an environment where providing debt relief services makes no business sense for the for-profit debt settlement providers and next to no sense for the non-profit credit counseling providers.

Many would argue that disabling for-profit debt relief is a plus because some have victimized consumers. Some would argue that all consumers who have the right to file for bankruptcy protection should. However, the fact remains that nobody wants to file for bankruptcy, except those who must because the have no money.

The distinction that is critical here is "no" money. Those who seek debt relief services very often have "some" money to offer creditors, just not enough money to pay their bills in full. The Internal Revenue Service, for giving credit-counseling agencies an exemption from taxes, has made some very restrictive rules about the "business" of providing debt relief. The most burdensome of which are regulations restricting what can be perceived as "business activities" beyond the core exempt purpose of consumer budget counseling and financial literacy education. Education and counsel are important, but what is currently needed by consumers is assistance with working out their debts with creditors; a business activity.

The unintended consequence of trying to keep profiteers out of the non-profit debt relief space is that credit counseling agencies are hogtied in helping consumers who cannot pay their bills in full for fear that those activities will be deemed "business".

State and federal authorities, in their zeal to protect desperate consumers, have wrought the unintended consequence of restricting the "business" of debt relief to such an extent as to make it unavailable to million of Americans looking for a safe and legitimate way to pay what they can, avoid bankruptcy, and get on with rebuilding their lives. Testament to this fact is the decrease in the number of legitimate non-profit credit counseling agencies from 850 to 324 in just one year – and dropping.

Credit counseling agencies are shutting their doors because their business model is suffering the double whammy of diminishing fair share and overly restrictive regulations.

The bankruptcy courts are inundated with good people in trouble. Numerous press reports have surfaced regarding extensive abuses by banks in the foreclosure market. Overburdened Chapter 13 trustees have publicly and privately appealed for help from a "voluntary" system to help consumers pay back a portion of what they owe. Again, all eyes fall on non-profit credit counseling, but they are dead in the water with no program and no will to battle creditors to get one.

The stage is now set in Utah to put less than full balance services safely into the hands of legitimate, accredited non-profit credit counseling providers. If state and federal authorities do not immediately revise the restrictive environment on debt relief services and encourage credit counseling agencies to step into the ring; the consumer will continue to be exploited by troubling debt settlement providers.

Courageous leadership in the credit counseling community has fired the first shot across the bow of creditors and begun the debate regulators. New services, like the one provided by AAA Fair Credit Foundation in Salt Lake City are starting the revolution for the modernization of credit counseling. We can only hope that their commitment to serve the public, not the creditor, will prevail. Legislative and regulatory authorities need to take a close look at re-imagining credit counseling in this unprecedented moment of consumer need.

About Harvey Warren:



Harvey Z. Warren is actively fostering a powerful national coalition of consumer advocates, lawyers, banking and collection leadership to establish guidelines for non-adversarial debt relief through non-profit credit counseling. A graduate of Ithaca College with a Master of Science degree from Syracuse University, Warren has worked with tens of thousands of debt-crushed consumers and appears frequently on radio and television commenting on the consumer debt crisis in America.

For more about Harvey Warren go to www.dropdebtbook.com or email at debtwriter@yahoo.com

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