New Bankruptcy Law Not Having Intended Effect

January 17, 2006 – Three months ago today, the United States new bankruptcy law went into effect. The law was hailed by Congress and the banking industry as a way to crack down on “abuses” by dead-beats who ran up their bills with the intent of never paying them. But if the past three months are any indication, those so called dead-beats are few and far between.

One of the primary provisions of the new law was a clause requiring those who are seeking bankruptcy protection to first go through credit counseling. The thought behind this was that many of those who file for bankruptcy would instead decide to join debt repayment plans, allowing them to pay off their debts over a number of years without declaring bankruptcy. But early indications are that the vast majority of those seeking counseling are so deep in debt that they don’t qualify for these repayment plans.

The nation’s largest credit counseling organization, Money Management International (MMI) counseled 14,907 debtors in the first thirteen weeks after the new law went into effect. Of these, only 669 qualified for a repayment plan, and only 42 of those debtors have actually enrolled in a plan.

MMI’s experience is not anomalous. Suzanne Boas, President of the Consumer Credit Counseling Service of Atlanta told a Washington Post reporter that of the 12,539 counseling sessions that the company has had since the new law went into effect, “virtually none of these people are really qualified” for anything other than bankruptcy.

Most companies conducting counseling charge fees that range from $20 to $75. But many of the companies providing counseling services are finding that their clients can’t even afford the fees. MMI has waived the fees in 60% of the cases it has seen.

It is still too early to tell what the overall effects of the law may be. Bankruptcies, where were being filed at a fairly steady rate of 30,000 a week under the old law soared to more than 300,000 per week in the two weeks prior to the new law going into effect. Since then, the overall number of filings has dropped to 5,000 per week but that number is rapidly growing. And just as ACCESS and other consumer advocacy groups had predicted, the reasons for bankruptcy filings remain the same. Most bankruptcies are still being caused but uninsured medical bills and job losses; two things which Congress completely failed to address in the new law.

Senator Jeff Sessions (R-AL), who was responsible for including the credit counseling clause in the law has said he is disappointed at the results so far but hopeful that the clause will help in the long run. His sentiment is echoed by the American Bankers Association.

But Senator Sessions hope may take some time to become reality as credit counseling services are becoming more difficult to get into. This is because the IRS announced last week that it is revoking the tax exempt status of 30 of the countries largest credit counseling services. This revocation will force many of these companies out of business, and will make the companies off-limits to consumers in the eight states that require credit counselors to be tax exempt. The IRS announcement will likely slow the process of filing for bankruptcy and, at the same time, increase the overall costs of filing.