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The recently passed Bankruptcy Abuse and Consumer Protection Act requires, as a condition of filing for bankruptcy, that all debtors first meet with an approved credit counseling agency. This is designed to ensure that all debtors receive some sound advice regarding money management so that they can avoid having to file for bankruptcy again in the future.
The more you know about anything, the better you will be able to deal with any problems that may arise, and it's no different with personal debt. The US Trustees office approves the agencies, and one would think that by doing so they have eliminated all of the disreputable credit counseling agencies from the mix.
It may not be so, and consumers with problem debt may still be at risk.
The Salt Lake Tribune recently reported that one agency that has been approved by the US Trustees to do business in Utah does not currently meet Utah state requirements for doing business in that state. Utah has moderately strict requirements for such businesses, including posting $100,000 bond and a simple filing to register to do business in the state.
How odd the Federal government would approve an agency that hadn't even bothered to file a simple form to do business in the state! Another agency that was recently approved by the Trustees is now under investigation by Utah officials after numerous complaints from consumers that the agency in question took their money but failed to actually submit any of it to creditors.
As we have pointed out before, the credit counseling industry is one that is full of fraud. People go to these agencies in desperation, seeking a way to avoid losing everything they have. The agencies, in turn, see an opportunity to obtain fees from the consumers as well as a settlement from the creditors, who share a portion of collected funds with the agencies.
It's a rare business opportunity to “double dip” and get money from both sides. In that regard, these agencies are not much different from bookies, who get money from both winners and losers on a bet.
The problem is that many such agencies aren't content with that arrangement and would rather just keep most or all of the money paid to them by their clients. This gets them in hot water with regulators and puts their customers in even deeper trouble with the creditors to whom they owe money.
It would appear that the government isn't being all that thorough with their screening process for “approved” agencies, so it's still very much a “buyer beware” situation for consumers. Your best bet remains to talk to those who have already met with any agency you are considering.
Find former customers and talk to them. Find out if they have had a good experience and take that into consideration before handing over you money to an agency with which you aren't familiar.
The problem is that there are a lot of dishonest agencies out there that would rather line their pockets than actually help their customers. With that in mind, many states have now established strict guidelines regarding who may and who may not call themselves a credit counselor. The latest state to jump in is South Carolina, which has recently passed legislation aimed at hte credit counseling industry that takes effect in December 2005.
Typical of those established in other states, the new regulations in South Carolina require the following:
• Applicants must first undergo criminal background checks. This seems like a great idea; if you're worried about an industry that is rampant with fraud, why not weed out those with a history of criminal activity at the application process? We aren't sure what the state will consider when looking at criminal background checks, but anyone with a history of any sort of financial legerdemain will probably not be issued a license.
• Licenses must be issued by the state, and a fee will be required. The fees, presumably, will be used to fund the background check and other associated items.
• Applicants will be required to fully disclose their own personal financial status. The state will then have an accurate picture of exactly who is handling the money of the customers. It stands to reason that anyone who has a history of financial problems of their own will probably not be in a good position to handle the finances of others.
• Put a cap on fees and establish fee guidelines. Counseling agencies will no longer be able to randomly set fees; they will be established by the state. This will provide a more evenhanded set of fees for all agencies, rather than the current situation, which has some companies charging modest amounts while others charge exorbitant setup charges.
While the legislation will regulate those businesses that have a physical presence in the state, it will not affect those that do business form out of state, via the telephone or the Internet. The very nature of doing business that way precludes the state doing anything about it.
Still, this is a step in the right direction and we hope that it will mark the beginning of the end of predatory companies that charge huge upfront an monthly fees and keep the money, rather than forwarding it to creditors. After all, if visiting a debt management agency makes your problems worse, rather than better, then you might as well not have bothered.