By Mike Stetzer
Three months after the new bankruptcy law took effect requiring debtors to see credit counselors before filing bankruptcy, only a tiny fraction are qualifying for any option other than bankruptcy.
Creditors lobbied hard for the reform that would require credit counseling before filing.
These creditors apparently believed that many consumers who were filing bankruptcy actually had the ability to make payments, and hoped these consumers would be deterred from filing.
In theory, that would have meant higher recovery for the creditors.
Instead, credit counselors are confirming what the consumers feared all along: bankruptcy is the only option for most of them.
By the time most consumers are considering bankruptcy, or even seeking help from a credit counseling agency voluntarily, they're too deeply in debt to have any real hope of regaining control and bringing payments up to date, even with professional assistance.
Money Management International, the largest credit counseling agency in the United States, reported that fewer than 5% of those consumers seen since the new requirements took effect on October 17 had enough income to even be considered for a debt management plan.
Factor in the fact that the vast majority of debt management plans fail, and only a tiny percentage of those who seek credit counseling can ultimately avoid filing for bankruptcy.
In fact, many of the consumers currently seeking to file bankruptcy are in such dire straits that they can't pay the credit counseling fee-a fee that typically ranges from $20-$75 depending on the agency.
Many agencies are reducing or waiving credit counseling fees, only to tell those consumers that they can't offer any solution other than bankruptcy.
Although the number of bankruptcy filings fell off dramatically in the weeks immediately following the change in the bankruptcy laws, those numbers are increasing.
Credit counselors expect that they'll continue to increase. The months following the holiday season are typically a peak time for consumers to seek help with financial crises, and this season has some special pitfalls for consumers.
In addition to the large number of consumers impacted by hurricanes Katrina and Rita, rising interest rates, increased energy prices, the federally mandated increase in minimum credit card payments, and the impact of the spike in fuel costs this past summer have all combined to put many consumers in difficult circumstances.
While the financial industry insists that it's too early to make any judgments, credit counselors predict that bankruptcy filings-already back up to more than 5,000 per week-will continue to climb.