Mandatory Credit Counseling Before Bankruptcy - The Unanticipated Results

In a study released in October, 2006 by the National Foundation for Credit Counseling (NFCC) on the eve of the one year anniversary of the 2005 Bankruptcy Reform legislation, there were a number of unanticipated results of the now mandatory pre-bankruptcy credit counseling.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires all debtors to get mandatory credit counseling before they are permitted to file a chapter 7 or chapter 13 bankruptcy.

One of the most surprising results of the study are that consumers filing for bankruptcy have a huge amount of debt, with average unsecured debt being almost $12,000 greater than their average annual income, and this ratio is getting progressively worse. In addition, consumers filing for bankruptcy protection are more likely to have mortgage delinquency problems, than those debtors who received non-bankruptcy related credit counseling.

Although phone and internet based counseling are the most common type of service delivery, as opposed to in person counseling, the time required to complete pre-discharge education sessions is taking more than 25% more time than aniticipated. These higher than anticipated costs mean that the cost of providing services exceeded the fee income collected by NFCC agencies. The study states that "Based on current estimates of 600,000 bankruptcy filings in 2006 and assuming the same delivery mix, an annual funding shortfall of $7.52 million appears likely for pre- filing counseling services delivered by NFCC agencies."

NFCC agencies waived the fee for services provided for all consumers unable to pay for them, meaning that 16 percent of pre-filing sessions and 13 percent of consumers attending pre- discharge education classes were provided free of charge. The big worry here is that if the costs of providing mandatory credit counseling becomes excessive, the entire credit counseling system may become difficult to continue, so stay tuned for further information.

Bernard Johnson has many years experience advising people on the pros and cons of credit counseling. He contributes to http://www.credit-counselling.org and has discussed mandatory credit counseling before filing bankruptcy, and consumer credit counseling.

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