Friday, November 11, 2005

Bankruptcy Reform legislation, effective last month requires that debtors obtain credit counseling before filing bankruptcy and in some circumstances before completing repayment plans; The US Trustee currently has approved only one agency in Nebraska to provide these services Another bankruptcy circus may be coming to town. Nebraska and Iowa reported a record number of bankruptcy filings in the days before a new, stricter federal law took effect Oct. 17. Now credit counseling firms are bracing for a similar rush on their offices. Credit counselors hold the new hoop that debtors must jump through before filing bankruptcy papers: mandatory credit counseling sessions. The problem - at least for now - is that few approved credit counselors operate in the Midlands. The Department of Justice's Trustee Program approves the firms that can do credit counseling. The department has approved about 80 agencies nationwide so far, and about 200 more have submitted requests for approval. However, Nebraska and Iowa each have only one firm that fulfills the requirement. The Nebraska counseling firm is in Omaha. The Iowa firm is in Waterloo. Other firms can provide counseling services over the phone or the Internet, but they are based in places like California, Georgia and Texas. "Everybody should have an in-person option," said Travis Plunkett, legislative director of the Consumer Federation of America in Washington, D.C. "The concern we have is that people will not have a choice. Vast swaths of the country are being served by national telephone agencies." Some credit counselors have checkered records, preying on vulnerable debtors and charging excessive fees, Plunkett said. The Department of Justice has done a good job of winnowing out those operators that might abuse the system, he said, which is probably why there are so few approved counselors. The Department of Justice requires that all counseling companies be in good standing with the community, charge "reasonable" fees and maintain nonprofit status. The firms also must have been in business for at least two years. The requirements prevent fly-by-night operators from taking advantage of the system, but they also mean certified counselors and startup companies will not be able to meet rising demand. New federal requirements for credit counseling so far have not caused problems or bottlenecks, but that's probably because of a sharp drop in filings following last month's unprecedented rush. Since Oct. 17, the Nebraska bankruptcy court has handled about 20 new filings. By contrast, the Nebraska Bankruptcy Court handled 3,553 chapter 7 and chapter 13 bankruptcies last month, almost all of which were submitted during the first two weeks of October. Diane Zech, clerk of the Nebraska Bankruptcy Court, anticipates a lull as the courts gradually process last month's backlog. "Some of the attorneys had to turn clients away," she said. "We still have a lot of aftermath to deal with." In the meantime, Nebraska's only locally approved counselor, Consumer Credit Counseling Service of Nebraska Inc., plans to bring on more help to meet what will surely be growing demand, said Betsy Downey, director of education. "We'll have to expand our (work force)," Downey said. "It's a lot better to do (counseling) face to face, and that's what we're aiming for." In the counseling sessions, a counselor will analyze debtors' finances and outline alternatives to filing for bankruptcy protection, such as negotiating a new repayment schedule. "Most people have very hazy ideas at best about what bankruptcy will do and what it won't do," Downey said. For example, she said, many people are unaware that some debts, such as student loans, may not be discharged in bankruptcy except under extraordinary circumstances. Also, few know that bankruptcy will affect their credit rating for at least seven years. Nathalie Martin, resident scholar at the American Bankruptcy Institute, said that while counseling sessions prior to bankruptcy probably will be "perfunctory," financial management courses required after bankruptcy will require more interaction to be useful. "My fear is that if we don't get more approved agencies out there," Martin said, "there's going to be difficulty providing those services." Sam Hohman, chief executive officer of Omaha's Credit Advisors Foundation, said her firm has yet to gain approval to do bankruptcy counseling, although it hopes to begin offering such services soon. She said long-distance counseling can be hard for debtors to access, especially if they have no credit cards and their bank accounts are closed. "Trying to pay for that service becomes nearly impossible," she said. "With only one local approved counselor, it's not enough."

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