In April 2005, Congress passed legislation comprising the most sweeping changes in U.S. bankruptcy law in more than a quarter of a century. The law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, was intended to prevent consumers with problem debt from being able to easily have their debts eliminated in court.

Under the old law, those with problem debt could file under Chapter 7 of the Federal Bankruptcy code; new filers will probably have to file under the more strenuous Chapter 13, which requires a repayment plan. Another provision of the new law requires anyone considering filing for bankruptcy to first submit to credit counseling prior to filing for bankruptcy.

On the surface, this isn't really a bad idea. After all, the purpose of credit counseling is to help people who have trouble managing money learn how to do so wisely. Clearly, anyone who is filing for bankruptcy has a money management problem, so credit counseling is probably a good idea. A competent credit counselor will assist their client with establishing a repayment schedule, learning to budget their expenses, and learning to avoid problem debt in the future.

The problem with mandatory credit counseling may be with the counselors themselves. With passage of the new law, the counseling industry is expected to be burdened with an additional one and a half million customers per year. This boom in demand will probably inspire a lot of people to become credit counselors who do not have their customers' best interests in mind.

A number or lawsuits have been filed in several states recently that accuse some credit counseling firms that are ostensibly nonprofit agencies of fronting for for-profit debt consolidation firms. These “friendly” nonprofit agencies will strongly urge their clients to do business with their for-profit partners. The result is often an expensive debt consolidation loan for the customer that may or may not be helping them eliminate their debt.

How can someone who is genuinely interested in credit counseling seek a reputable counselor?

• A counselor should listen to your problems. If the counselor starts offering “solutions” to your problem within a few minutes of your arrival, you should be suspicious. A good counselor needs a lot of information about a client in order to help them, and that takes time.

• Be wary of firms that ask for a lot of money up front, especially nonprofit firms that tell you that they cannot help you unless you pay first.

• Be cautious of firms that ask for a large fee to obtain a copy of your credit report. Any legitimate agency should be able to obtain your credit report for free.

• Bankruptcy is sometimes unavoidable. Watch out for agencies that tell you that bankruptcy is never necessary. They probably want to steer you towards a high-profit consolidation loan that may not help.

• Watch out for offers of a quick fix. You didn't obtain debt problems overnight, and you won't get out of trouble overnight. Real problems take time to solve.

• Ask the local Better Business Bureau if they have had any complaints about a particular counseling agency.

The careful consumer can avoid making a bad situation worse by choosing their counselor carefully. Take your time and talk to several agencies before making a decision. It could save you a lot of money.