All that homework, however, didn't keep the couple from enrolling in the Consumer Credit Counseling Service of Utah, which folded after state investigators accused it of taking money from consumers but failing to help them manage their debts.
Under a new federal law that takes effect Oct. 17, people who want to file for bankruptcy must participate in credit counseling prior to filing. But the measure, intended to help educate families about alternatives to bankruptcy, also pushes some of the most vulnerable families into an industry plagued by fraud.
"There are some really good debt counseling companies, but there are some really bad ones out there, too," said Ann House, a bankruptcy specialist with Utah State University. "Who is going to visit these companies and make sure they are really helping people? It's ripe for abuse."
Abuse of consumers, though, was something backers of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 weren't counting on when they crafted the complex law. The measure is designed to curb abuses of U.S. bankruptcy law by making it harder for some people to walk away from their debts. It also is designed to educate heavily indebted families about alternatives to filing for bankruptcy and help them change the way they handle their finances to lessen the likelihood they will file again.
Specifically, before someone can file for bankruptcy, they must in the past 180 days have received an individual or group briefing from a nonprofit credit counseling agency approved by the federal government, said U.S. Bankruptcy Court Clerk William Stillgebauer. They also must complete an educational course from an approved provider - often the same credit counselor - prior to their bankruptcies being finalized.
Credit counselors negotiate with creditors and help teach borrowers how to reign in spending and get out of debt without seeking bankruptcy protection.
Although the new law doesn't specify how much counseling people must get or how much they should pay, the U.S. Trustee has indicated that it would be reasonable to pay as much as $50 for an hour and a half session. Agencies approved by the U.S. Trustee - listed at www.usdoj.gov/ust - are supposed to accept people who want to file for bankruptcy regardless of their ability to pay.
Mandatory credit counseling, though, is troublesome given the fact that it is difficult if not impossible for consumers to know if they have selected a legitimate counseling organization.
CCCS of Utah, for example, was highly regarded - right up until a state investigation into mismanagement of client funds.
The nonprofit was set up to help indebted Utahns avoid bankruptcy by negotiating with their creditors for better repayment terms on their debts. Clients sent monthly payments to CCCS, which put the money in a trust account before forwarding it to creditors.
Early last year, however, clients began contacting the state claiming their creditors were not receiving money paid to CCCS.
According to the settlement with the state, CCCS and its principal, Scott McCagno, "neither admits or denies responsibility for what has occurred, but he acknowledges there has been mismanagement within CCCS." Former CCCS clients say they are still trying to repair credit records marred by the company.
The Federal Trade Commission and the Internal Revenue Service have investigated scores more such groups in other states.
Earlier this year, for example, the FTC said three debt counseling groups scammed consumers out of more than $100 million by promising easy debt relief. The regulatory agency said in a number of cases consumers were forced into bankruptcy.
Lydia Parnes, acting director of the FTC's Bureau of Consumer Protection, said the FTC is "committed to ridding the debt services industry of companies who shatter consumer confidence."
Although there are likely still a number of unscrupulous debt counselors operating nationwide, there are some rules in place to protect consumers from them. Any company doing business in Utah, for example, must register with the state Division of Consumer Protection and take out a $100,000 bond, said Francine Giani, director of the Utah Department of Commerce.
And the U.S. Department of Justice's U.S. Trustee Program requires debt management companies that want to be approved providers of counseling services under the new bankruptcy law to fill out an application and post a separate bond that varies on the size of the company and other criteria.
But as with any facet of credit counseling, it is buyer beware. Just last week, one of five debt counseling services approved by the U.S. Trustee to help Utahns filing for bankruptcy under the new federal law was operating in Utah illegally.
Springboard Nonprofit Consumer Credit Management was not registered to do business in Utah, a requirement under state law. Nor did the Riverside, Calif., company have a $100,000 bond, certificate of deposit or letter of credit specific to Utah, another requirement.
Told of the compliance problem, Utah Department of Commerce Director Francine Giani sent a letter to the company asking them to contact her office. The company said the lack of registration was an oversight and pledged to fix the situation immediately.
Still, Giani said, Springboard was operating without a bond, and without one, "there is less we can do to help consumers if there is a problem."
Bankruptcy attorney John Penn, president of the American Bankruptcy Institute, said a number of consumer advocates remain leery about requiring people to go to credit counselors.
But the law requires only a small amount of counseling - as little as 90 minutes - and does not force people to enroll in debt management plans - two provisions Penn believes should cut down on problems.
Under debt management plans, customers send monthly payments to their credit counseling company, which puts the money in a trust account before forwarding it to that customers' creditors.
Much of the fraud that has occurred in the industry has centered around these plans, which are vulnerable to a host of problems, such as embezzlement.
Utah financial counselor Jean Lown said consumer protection is only one concern about mandatory credit counseling.
Another concern is that a short counseling session prior to bankruptcy may be a waste of time and money. Much of the counseling likely will be accomplished in an hour and a half over the phone or via the Internet instead of a series of one-on-one sessions.
People who are close to filing for bankruptcy often are convinced that filing is the only option and no amount of counseling will change their minds, Lown said.
"Although Congress may have had the best of intentions, I don't think many people who want to file for bankruptcy will go to credit counseling and then say "I don't need bankruptcy after all," she said. "It's really hard to turn people around."
In addition, she said, some people will have too many debts and too little income to do anything but file for bankruptcy.
"How are they supposed to pay for this counseling?" she said "Charge it on their Visa?"
The Larsens, who sought help from the Consumer Credit Counseling Service of Utah in December 2002, refused to consider bankruptcy.
But they say they were pushed closer to financial disaster after enlisting the help of CCCS, which they say took their money and distributed it late to creditors and in some cases, didn't forward it on to creditors at all. The result: Several black marks to their credit report.
The couple - along with scores of other Utahns - eventually cut ties with CCCS, which eventually went out of business after being investigated by the state. After what they went through, "going through another credit counseling company wasn't an option," Susan Larsen said.
So they worked through their problems on their own. Today they are nearly debt free. "Our goal is stay out of debt," she said. "Besides a mortgage, there's really no reason to be in debt. We learned that the hard way."
How the new law affects small-business owners, consumers
More costly
Filers likely will face higher attorney costs and will pay for education and credit counseling services. Income limitsPeople who earn more than the state's median income in the six months prior to filing for bankruptcy may not qualify for Chapter 7 relief. For more information, go to http://www.usdoj.gov/ust/bapcpa/meanstesting.htm
Counseling classes
Consumers generally must get credit counseling from a government-approved agency within 180 days before filing. Most debtors also must complete an educational course in personal financial management before a court will discharge their case. A list of approved agencies that can provide counseling to Utahns is available at http:// www.usdoj.gov/ust.
Student loans stick
An educational loan from a private lender that is not guaranteed by the federal government has a good chance of being discharged under Chapter 7 bankruptcy today. Under the new bankruptcy law, these loans will be very difficult to escape. Federally guaranteed student loans, such as Stafford student loans, are nearly impossible to abandon under Chapter 7 bankruptcy and will continue to be under the new law.
Debtors could lose wheels
People who file under Chapter 13 repayment plans likely will be responsible for the full balance of their car loans instead of having to pay only the automobile's fair market value under the old law. Given how cars depreciate, the difference could be significant. Source: American Bankruptcy Institute
Unlucky 13
More business owners will be forced to reorganize under Chapter 13 and make payments under a court-approved reimbursement plan instead of getting immediate relief under Chapter 7, which involves selling assets to repay creditors so those who owe money can get a fresh start. Plus, sole proprietors now may be forced to file bankruptcy protection as individuals if the bankruptcy judge determines that most of their debt is personal.
Preference payments
Payments made just before a business files for bankruptcy won't automatically be forfeited to the bankruptcy trustee so the money can be distributed among all creditors. Instead, small business owners can keep so-called preference payments of less than $5,000. Those who collect more than that only need to establish the money was received in the ordinary course of business to avoid returning it. Bankruptcy trustees seeking to recover preference payments of $5,000 to $10,000 will have to file the claim in the place where the small business resides, making it less likely the business will settle just to avoid legal fees. Also, vendors can "reclaim" goods provided to a debtor during the 45 days preceding the start of the bankruptcy case and 20 days following the bankruptcy filing.
Less paperwork
The process for approving a reorganization plan will be easier and less expensive. For example, a small debtor, with court approval, may skip filing a detailed disclosure statement and solicit prior approval of the plan from creditors.
More input
The creditors' committee, which usually consists of the seven largest creditors, can be expanded to include more representation by small businesses.
Selecting a credit counselor
Whether you are trying to avoid bankruptcy or are planning to file, you should do some homework before selecting a credit counseling agency. Here are some tips to help narrow your search: * If you are filing for bankruptcy protection and required to participate in credit counseling, log on to the U.S. Trustee Program's web site at www.usdoj.gov/ust to view a list of agencies approved by the federal government.
* Whether you are filing or not, make sure the counseling company you select is registered and bonded with the state of Utah. Such organizations must take out a $100,000 bond. For a list of registered and bonded groups, go to http://www.commerce.utah.gov. Click on Consumer Protection, Education and then Registered & Bonded Credit Service Organizations. Or call the division at (801) 530-6601.
* Contact your bank, credit union or credit card company and ask if they have any recommendations.
* Do not be impressed by the fact that an organization is a nonprofit. Virtually all credit counseling groups -- good and bad -- are nonprofits. Membership or accreditation by national organizations also is no guarantee a credit counseling company will provide a quality service.
* Watch out for companies that say they can remove negative items from your credit report or help you get out of debt easily. Getting out of debt takes time and sacrifice.
* Insist on a written agreement that includes in detail the services the company will perform and what it will cost.
* If you believe you have been victimized by a credit counseling organization, call the Utah Division of Consumer Protection or contact the FTC at 1-877-382-4357 or www.ftc.gov.
Source: Federal Trade Commission, Utah Department of Commerce
