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Credit Counseling/Debt Reduction Services - Required, but Watch Out!

The 2005 changes to the Bankruptcy Code required that a person seeking to file bankruptcy first complete consumer credit counseling from an authorized provider. 11 USC sec. 109(h). A debtor must obtain a certificate of consumer credit counseling, at a cost of about $50 to $75. The certificate expires after 180 days. The counselor may or may not provide a "debt management plan" proposing that the debtor pay off his debt over time; if the debt management plan is created, it must be filed with the bankruptcy.

Before 2005, consumer credit counseling services were provided through non-profit organizations generally set up by credit card companies (or their associations) to encourage debtors to make an effort to pay their debts by entering long term payment plans. Generally, the credit card companies would agree to lower their interest charges, and eliminate or reduce fees, in exchange for payments which would pay off the debt over time (typically up to five years). This sort of program is still available; in Alaska, Consumer Credit Counseling Services of Alaska is one scuh agency. The credit counseling service charged a percentage of the payments as its fee. Sometimes the plan worked, and the debtor was able to pay off the credit cards as agreed, but far more often, the debtor eventually was unable to make the required payments, and the credit card bills were re-set as if the full interest and fees had been charged all the time. The credit card company had the benefit of payments it might not have otherwise received, and still was able to sue the debtor for the full amount of its original claim. Even if the debtor discharged the debt in bankruptcy, the credit card company came out way ahead of where it would have been if the debtor had filed bankruptcy at first.

Now, debtors who think they want to file bankruptcy must contact a consumer credit counseling service before they can proceed with bankruptcy. This created a huge market for new consumer credit counselors. At best, they're no worse than the older, more established firms. However, many have extremely high fees, charged up front or front loaded into the payments. Many make promises they can't keep: they claim they will prevent lawsuits, or "handle" things with the creditors, even though they have no way to ensure that they can control what the creditor will do. They want to get a deal made with the debtor, bringing fees in the door, even if it's not in the debtor's interest and is very unlikely to work in the long run.

What can you, as a possible bankruptcy debtor, do to protect yourself? You will have to meet with some consumer credit counselor before you can file bankruptcy. Some do not prepare "debt repayment plans." These companies, like Hummingbird.org, are not trying to help the creditors or take big fees from you; they just charge a fee for the certificate of consumer credit counseling so you can proceed with your bankruptcy (Hummingbird charges $49, payable to your bankruptcy lawyer, for either individual or joint credit counseling). If you feel pressure from the consumer credit counselor to sign up for payments you aren't absolutely sure you can afford to make, or if the fees he wants are paid up front, or exceed 10% of the total payments, run!


At the Law Offices of H. Frank Cahill, in Anchorage, we represent clients throughout Alaska, including, Wasilla, Dillingham, Palmer, Valley, Kenai, Fairbanks, Kodiak, Seward, Soldotna, Homer, Juneau, Wrangell, Petersburg, Bethel, Nome and Sitka; in Fairbanks-Northstar Borough, North Slope Borough, Northwest Arctic Borough and Bristol Bay Borough; and across the Kenai Peninsula. 

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.