Bankruptcy Approved Credit Counseling Agencies


The ABCs of Credit Counseling Brief History

The credit counseling industry developed in the mid-1960’s through the efforts of credit card companies that saw a creative opportunity to recover overdue debts. Creditors created the industry and provided the bulk of the funding needed to keep the agencies in business. At first, most of the agencies were non-profit and called themselves the Consumer Credit Counseling Service (CCCS) of the regions they served. The CCCS agencies were affiliated with the National Foundation for Consumer Credit (NFCC), now called the National Foundation for Credit Counseling. Presently, there are many other types of credit counseling agencies and other trade associations such as the Association of Independent Consumer Credit Counseling Agencies (AICCCA). The vast majority of credit counseling agencies have been granted tax-exempt status by the Internal Revenue Service (I.R.S.). Yet, not all agencies behave like true non-profits. As of October 17, 2005, before filing for bankruptcy most applicants must now undergo credit counseling in a government-approved program. You can get more information on the procedure for pre-filing credit counseling (and a list of approved credit counseling agencies) from the U.S. Trustee Program (a component of the Department of Justice responsible for overseeing the administration of bankruptcy cases).

Differences Between Debt Management and Debt Settlement

Credit counseling and debt management plans won’t help lower your secured debts. However, a debt management plan might help you lower your unsecured debts, making your home and car payments more affordable. If you are in danger of losing your home or car, bankruptcy may be your best option.

Through debt management plans (DMP’s), a consumer sends the credit counseling agency a lump sum, which the agency then distributes to the consumer’s creditors. In return, the consumer is supposed to get a break usually in the form of creditor agreements to waive fees and to lower interest rates. Consumers also gain the convenience of making only one payment to the agency rather than having to deal with multiple creditors on their own. In the past, agencies charged little or no fees to consumers enrolling in debt management plans. Now many agencies charge as much as a full month’s consolidated payment simply to establish an account.

Unlike most credit counseling agencies who attempt to manage debt, debt settlement and debt negotiation companies are usually for-profit businesses. Settlement services are different from debt management mainly because the debt settlement companies do not send regular monthly payments to creditors. Instead, these agencies generally maintain a consumer’s funds in separate accounts, holding the money until the company believes it can settle the consumer’s debts for less than the full amount owed. Many companies advise consumers to stop paying their debts as a condition of participation in the program. Nearly all companies have a minimum debt requirement. Of our survey of thirteen debt settlement companies, nine specifically stated a minimum amount of debt required for the program. These amounts ranged from $5,000 to $10,000. All of the programs handle unsecured debt only. The companies have different ways of doing business, but nearly all of them require the consumer to set aside money each month. Sometimes the settlement company will set up an account for the consumer. In other cases, they will ask the consumer to show proof of an account. They will almost always figure out a way to take their fees directly from the account. The companies require the consumer to deposit a certain amount in the account each month. This is intended to build up a fund that can later be used to try to settle debts. In the meantime, the consumer does not make payments on her debts. This means that she could be sued for collection or face pressure from debt collectors. The ways in which companies assist or don’t assist consumers with these collection efforts are discussed in detail below. The Better Business Bureau summarizes the business model as follows: Debt settlement companies “…usually instruct their clients to stop paying their creditors. Some companies direct them to make their payments to the debt negotiation company instead and promise, when the company has accumulated enough to offer a cash settlement to one or more creditors (which can take as long as two or three years) to pay off the debt. The debtor must pay fees to the service during the time the payments are accumulating. Other companies simply collect the fees and advise debtors to save their money to pay their creditors themselves.”1 Another key difference occurs with respect to the laws that cover debt settlement companies. Because most debt settlement companies are for-profit businesses, they are not exempted from numerous consumer protection laws that exempt non-profits.2 This report includes detailed information about numerous existing laws that cover debt settlement companies (and in some cases debt management as well). The recommendations section contains proposals for improving existing laws and crafting stronger, more targeted debt settlement laws.