Congress Makes Debt Harder To Erase, Requires Credit Counseling

Congress on Thursday approved landmark bankruptcy legislation that is expected to give a boost to a fast-growing business tarnished by high-profile scandals.

The measure requires anyone seeking court relief from their debts to first pay for financial education through non-profit credit counseling agencies, an industry that congressional investigators exposed last year for abusive sales tactics and rampant profiteering.

The bankruptcy bill passed the House by a 302-126 vote, after clearing the Senate 74-25 last month. President Bush is expected to sign it shortly.

Backed by credit card firms and other lenders, the measure will make it harder for Americans to erase their debts in bankruptcy, partly through the credit counseling requirement.

Supporters of the bill say it imposes new regulations that will eliminate abuses among counseling firms.

The new law will "go a long way to disqualify the predatory practices," said Sen. Norm Coleman (R-Minn.), who denounced corrupt debt-relief firms in hearings last year as "telemarketing sweatshops designed to take advantage of thousands of people in bad financial positions."

But critics say the legislation provides too little oversight and too much leeway for wrongdoing.

"This is an industry that has had all kinds of problems, and this may be requiring people to go to those same problem agencies," said Deanne Loonin at the National Consumer Law Center, who co-authored a recent report titled "Credit Counseling in Crisis."

"This will somehow be turned into an entrepreneurial opportunity," Loonin said.

Some critics predict the new legislation will merely encourage superficial counseling programs that fulfill the legal provision at an additional cost while providing no meaningful benefit.

Others say the credit counseling contemplated in the law can't hurt. Requiring financial education both before and after bankruptcy at least takes advantage of "a teachable moment," said William Binzel, of the National Foundation for Credit Counseling.

"I'm not sure it's a gift to the industry so much as a consumer benefit," said Binzel, whose trade group represents non-profit counselors that agree to abide by a national quality standard.

Supporters and critics agree that for better or worse, Americans will be getting a lot more credit counseling if the new law goes into effect later this year, as expected.

Credit counseling wasn't always so controversial. Banks and credit card companies launched the practice in the 1960s to advise consumers on how to handle their debts.

From the beginning, a popular option was the debt management plan, or DMP, in which counselors would negotiate a fresh start with credit card issuers and other unsecured creditors. Consumers would then send a single monthly payment to the counselor, who would pay off the debts. Fees were low, and most of the costs were borne by creditors.

During the 1990s, the boom in consumer debt spawned a new breed of unscrupulous agencies that took advantage of their non-profit tax status. Instead of inexpensive, face-to-face counseling, these Internet- and telemarketing-based operations specialized in collecting excessive fees for DMPs while delivering little relief.

At the same time, financial companies cut funding for counseling, reducing the availability of high-quality programs just as boiler rooms were coming on strong. At the hearings held last year by the Senate Permanent Subcommittee on Investigations he heads, Coleman cited "excessive fees, pressure tactics, non-existent counseling and education, promised results that never come about, ruined credit ratings, poor service and in many cases being left in worse debt than before."

Under pressure from lawmakers, the Internal Revenue Service and Federal Trade Commission intensified a crackdown. State attorneys general, including Illinois' Lisa Madigan, already were taking on some of the most aggressive counseling agencies. Two weeks ago, the FTC settled charges with three operations the agency said had "scammed consumers out of more than $100 million by promising easy debt relief."

The legislation approved Thursday depends heavily on the U.S. Trustee to assume a critical new gatekeeper function.

The trustee's office, a part of the Justice Department charged with overseeing the federal bankruptcy system, would pick up the additional task of certifying credit counselors under the law. So far, however, it has not established procedures for carrying out the new duties.

As it stands, the trustee's office faces a "very difficult" task, said James Sprayregen, a leading Chicago bankruptcy lawyer who is a partner at Kirkland & Ellis.

"I don't believe the U.S. Trustee has been given the resources or the tools," he said. "This will burden them tremendously."

Thursday's congressional action marks the biggest rewrite of the bankruptcy code in a quarter-century.

Debate in the House was acrimonious as Democratic opponents warned that the measure would hurt the economically vulnerable. For the financial companies that backed it with an extensive lobbying campaign, eight years of effort culminated in a significant victory. Proponents such as J.P. Morgan Chase & Co. and the finance arm of General Motors Corp. argued that unpaid consumer loans cost every American $400 a year in higher prices.

The measure, which takes effect six months after enactment, would require people with incomes above a certain level to repay credit card charges, medical bills and other obligations under a court-ordered plan. People with low incomes and few assets could continue to file under Chapter 7 of the bankruptcy law, which allows a judge to wipe out debts after some assets are forfeited.

This is President Bush's second pro-business legislative victory since his re-election. In February, Congress enacted a bill that moves many class-action lawsuits from state courts to federal courts considered friendlier to corporate interests.

Democrats complained that House leaders refused to let them introduce 35 amendments, including measures to limit credit card interest and exempt people with large medical bills from the bill's debt repayment requirements. The House voted 227-196 to bar any amendments.

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