I hope all of you had a Happy Thanksgiving! Over the holiday, I read some interesting articles debating the value of credit counseling requirements that are part of the bankruptcy reform legislation. Some people are happy about these new requirements because they feel credit counseling offers debtors alternatives that they would not have been offered without credit counseling. Others see these requirements as yet another obstacle that must be overcome before debtors can obtain true debt relief.

The US Trustee’s office is required to review programs offered by any agency seeking to be approved as a pre-filing credit counseling provider and as a post-filing educational course provider. The US Trustee requires companies, among other things to demonstrate extensive credit counseling experience, be bonded, and offer a bona fide counseling session (though the session could be over the phone or on-line and not necessarily done in person). The US Trustee’s office requires any company seeking to be approved to go through an extensive application process highlighting its experience and conducts a detailed review of its programs. This review and approval process is meant to insure that debtors are receiving good information from reputable, independent companies that are focused on providing a service to the public and not profit motives.

At first glance, it appears that the legislation is attempting to insure that debtors are getting helpful information from companies that have the debtor’s best interests at heart. However, many other people don’t see it that way. The Editor and Publisher of Privacy Times, a Washington newsletter that covers the information world, Evan Hendricks (according to the Lincoln Journal Star) sees something missing. “They say they’ll advise (potential filers) of all their options,” he said. “But some of those are legal options, and credit counselors are not licensed to practice law.” He feels that the motives of some of the credit counseling agencies are in meeting the needs of creditors, particularly large, financial services companies. “It looks like a way to discourage people from filing bankruptcy and places someone between the consumer and their legal representative,” he said.

Credit counseling agencies admit that they are partially supported by creditors who benefit when someone arranges a payment plan as opposed to filing for bankruptcy. However, more than half of their budgets typically comes from fees paid by clients. Typical credit counseling fees vary, but are usually around $50 for a single debtor and $60 for a couple for both the pre-filing counseling and the post-filing educational session. The US Trustee requires that agencies who are approved also offer services “without regard to ability to pay” insuring that some debtors can obtain the services without cost, but that is typically handled on a case-by-case basis and is up to the credit counseling service provider to determine on its own.

The question, though, is whether or not the counseling helps to educate debtors, as it was intended? Or, is it simply another barrier to debt relief? Credit counseling advocates say that they don’t steer potential bankruptcy filers away from bankruptcy. They insist that they discuss all sorts of financial issues with debtors. Obviously, the initial information a credit counselor asks the debtor is about income and monthly living expenses. But, credit counselors insist they also look at all of the debtor’s assets, liabilities and net worth as opposed to just money management issues. Credit counselors insist debtors will benefit because they will better their knowledge of financial matters. Credit counseling advocates don’t believe consumers have bettered their knowledge in the past.

From my perspective, I always viewed my job as a counselor exploring bankruptcy options with potential clients to review ALL options. As their attorney, or potential bankruptcy attorney, I have ethical obligations to review all of these things credit counselors say they are exclusively able to review. I also have legal obligations to make sure bankruptcy is in my potential client’s best interests. I don’t believe a credit counselor is more qualified than I am in analyzing my potential client’s financial situation. In fact, I believe attorneys are better qualified, have had more training, and have more obligations to potential clients than credit counseling agencies do. Obviously, Congress feels that credit counseling agencies offer a better exploration of these issues than attorneys. I strongly disagree with this conclusion.

Also, as one staff attorney from the National Consumer Law Center pointed out that the credit counseling and debtor education requirements are not selectively imposed on debtors who are considering bankruptcy because of financial mismanagement. While many people find themselves considering bankruptcy because of bouts of financial irresponsibility and mismanagement, there are a lot of debtors who are considering bankruptcy because of circumstances that had nothing to do with financial mismanagement or irresponsibility. Health issues, divorces, and unexpected layoffs have caused many more people to file for bankruptcy than simple financial mismanagement. As John Rao of the National Consumer Law Center (as quoted in the Lincoln Star Journal points out: people “caught in a divorce or with health problems will have to go through a lot more hoops to get relief, which is not fair.” As I see it, people considering bankruptcy because of these issues don’t benefit at all from “education” or “counseling” because education and mismanagement was never the problem.

For the people who are considering bankruptcy due to uncontrollable, unforeseen, and unplanned health and marital problems, the credit counseling and debtor education requirements serve only to put up roadblocks to relief don’t provide any benefit. There is no individual benefit to the debtor, nor does the requirement in any way benefit society’s interest in reducing the need for bankruptcy.

I read an article in this morning’s Chicago Tribune that discussed Illinois median incomes. The article was citing a recent study of median income in the United States. The study found that the median income in Illinois is declining. In fact, incomes once adjusted for inflation are at a 1989 level! Illinois had the biggest drop in median income with Michigan second.

Unfortunately, we all have heard plenty of stories about the housing market and the “bubble.” Housing prices continue to increase rapidly all over the country. There are differences from place to place, but generally the cost of owning a house has increased exponentionally over the last 10 years.

Things like housing, fuel, vehicles, utilities, groceries continue to increase in price, yet this report points out that incomes are falling! We hear talk about rising inflation and about the Federal Reserve considering policies to reduce inflation. I heard a report on NPR Radio pointing out challenges of the new Federal Reserve Chairman. One of the challenges was trying to set targets for inflation.

Unless my math is wrong, I don’t know how it is possible for people to continue to pay higher prices for basic necessities while their incomes fall. Aside from using retirement assets early or being one of the fortunate few who can live off of inheritances or other family support, the only way society can maintain this situation is for banks to lend more money either in mortgages, refinancings, HELOCs, credit cards or other types of credit. The bottom line is that consumers are borrowing more and more with less and less ability to pay the debt back.

The good news is that the bankruptcy law helps consumers who get in over their head. Much has been made about bankruptcy reform and there have been significant changes to the laws, but bankruptcy, either Chapter 7 or Chapter 13, remains an effective way to help someone get out of debt. Give us a call, you might be pleasantly surprised!

Wow! What a month. I recently ran across a newspaper clipping; “a longtime bankruptcy court clerk who routinely dealt with people facing mounting debt is accused of giving out false information so she could pocket their money” - Chicago Sun-Times, 9/13/05! The good news for our clients is that none of them were taken advantage of by this scheme.

Allegedly, this woman who had worked at the bankruptcy clerk’s office in Chicago and was making $69,000 per year on her job was arrested when the FBI sent an undercover witness who approached the woman saying he had just filed for bankruptcy and needed help because he feared losing his house. Instead of telling him that his bankruptcy filing alone would be enough to stop the sale of his home, she took $500 from him to “block the foreclosure.” She even staged a fake phone call to Chase Financial pretending to arrange the transaction. The call had to be fake because the name the undercover officer used was fake and there was no such mortgage she said she looked up. This clerk had also taken $5,000 in 2002, allegedly, from another debtor to “stop foreclosure” on her house.

This situation illustrates why it is important to have quality, responsible bankruptcy attorneys as you consider whether or not to file for bankruptcy. It’s not that you will fall victim to fraud if you don’t have bankruptcy lawyers. The problem is that these people were vulnerable to the court employee because they didn’t understand how the process worked and didn’t understand their rights under bankruptcy. Instead, they asked for help from someone other than an attorney and they were taken.

Remember, your attorney is doing more then typing paperwork. An attorney is offering you knowledge of how the laws work and representation to deal with creditors who you perceive may be “ignoring” the bankruptcy. This is one reason among many why you should hire a lawyer to help you through this process. While you may be very adept at preparing the paperwork, would you know what to do if a creditor “ignored” your bankruptcy paperwork?

Given the bankruptcy law changes and examples like above, the investment in quality legal representation is worth every penny. If you feel overwhelmed by debt with little hope of getting out, please give one of the firm’s attorneys a call. We can help you analyze your situation and propose solutions we can deliver for you.