Counselors Try to Cope As Funding Support Fades

  More business is not always a good thing. Just ask many of the nation's leading credit counselors.
  Last year's sweeping bankruptcy reform, which requires counseling before bankruptcy filing, had credit counseling agencies across the country anticipating a fresh rush of business this year. The rush has arrived, but the money has not shown up with it.
  The National Foundation for Credit Counseling on April 17 said its members had counseled more than 188,000 consumers since the new bankruptcy law went into effect Oct. 17. The federation says it represents 70% of the government-approved agencies that can provide pre-filing counseling.
  As a result, credit counseling agencies that are part of the new federal program often find themselves requiring more staff without having the additional revenue to pay for the personnel. At the same time, traditional funding from sources such as creditors is drying up as creditors face their own dwindling profit margins.
  Several agencies are spending these first months after the new bankruptcy law trying to determine how to cope. They are looking at everything from Internet counseling to government funding to new kinds of debt-settlement programs.
  It is all another surprise consequence of the Bankruptcy Abuse Prevention and Consumer Act of 2005. Debtors now required to undergo credit counseling are bucking expectation by not qualifying for non-bankruptcy alternatives such as debt-repayment plans.
  Instead, the new customers are the "sickest of the sick financially," says Susanne Boas, president of Consumer Credit Counseling Service of Greater Atlanta, one of the nation's largest agencies certified to provide pre-filing counseling. For these new customers, bankruptcy, instead of a repayment plan, is the lone alternative.
  This presents a problem for the largely nonprofit industry. Credit counseling agencies typically generate revenue from debt-management programs, in which creditors allow the agency to keep a percentage-or a fair-share contribution-of the settlement amount. Creditors usually give the agency about 7% of the settlement amount, though in the past these fair shares have reached as high as 20%.
  In contrast, an agency providing counseling to those with no hope of repaying bad debts without filing for bankruptcy can expect to see only $40 or $50 from the required 90-minute counseling session. Sometimes they will not even see that, since the new law calls for an agency to waive the fee at a consumer's request.
  "We have to keep our doors open," says Bettye DeRamus, program director for Consumer Credit Counseling Service of Aurora. "We are applying for grants, looking for donations, any way we can to fund this."
  Credit counseling professionals say their goal is the debtor's financial health, not making money. But the industry also is suffering under government accusations of excessive fees and high profits from debt management programs.
  Meanwhile, while many observers expected filings to decline under the new law, current numbers linger around 5,500 filings per week. As they begin to grow again, experts are predicting an annual load of around 1.5 million. That is a lot of work for the 110 agencies certified to provide pre-filing counseling by the U.S. Trustee's Office.
  "It remains to be seen if 100 or so agencies will be sufficient to meet the demand," says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. "I have the feeling it will not be."
  To meet the new need, almost all counseling agency directors are hiring in big numbers, often doubling their staffs. "You have to try to continue to staff it with reduced revenues," says David Hill, credit counseling coordinator for Chestnut Health Systems in Illinois. Hill says he has seen a 50% increase in business since the new law took effect.
  COST COVERAGE
  "At $40 per counseling session, [after] the educational materials, mailing, counselor time, there is no agency getting rich on this, I'm sure," Hill says. "We're just barely covering our cost."
  Money Management International, one of the largest national counseling agencies, has hired 72 new counselors, with nearly 30 new hires pending, according to company spokesperson.
  At Consumer Credit Counseling Service of Greater Atlanta, Boas reports the agency has hired 35 additional counselors, almost doubling its staff. At California-based Springboard, President and CEO Diane Wilkman says she also has nearly doubled her staff. And at New Jersey-based Novadebt, new hires have jumped 25%, according to Joel Greenberg, president and CEO.
  But Greenberg, who is also board chairman of the Association of Independent Consumer Credit Counseling Agencies, says the high numbers of filers heading straight into bankruptcy-nearly 98% of his customers-translate into sluggish revenues. The association, as are others in the industry, is hoping that creditors will begin to look at different kinds of payment plans for the new population. It is working with the major credit card issuers to figure out payment plans other than traditional debt-management programs, Greenberg says.
  Possibilities include debt-settlement plans that reduce principal and eliminate interest, with a regular payment period of five years.
  But while debt-management programs are 100% repayment plans, plus interest, under a debt-settlement plan the debtor would owe income tax, says Leslie Linfield, director of the Institute for Financial Literacy, a credit counseling agency that does not offer the programs.
  Several agencies are beginning to provide mortgage-default counseling as another way to decrease dependence on shrinking fair shares.
  Grants are another fresh source of funding. While some large banks have grant programs, grant funding is less stable than fair-share contributions. "Grants are much more uncertain," says Chestnut's Hill. "Just because you get it this year doesn't mean you'll receive it in the future."
  Another tool to help agencies deal with lower revenue is the Internet. Springboard's Wilkman likens Internet counseling to online traffic school. "It's a valid delivery mechanism that people want and deserve," she says.
  Former bankruptcy attorney Kevin Chern, who has developed a one-stop-shop Web-based program for bankruptcy attorneys, says the Internet will spell the difference between those agencies that can make it and those that cannot.
  "From an economic standpoint it will be very challenging for a not-for-profit to maintain a place in the pre-bankruptcy filing industry without an Internet-briefing aspect to their program," Chern says.
  In her 2005 State of the Credit Counseling Industry address last September, National Foundation for Credit Counseling President Susan Keating said, "It is no secret that we are operating in an increasingly difficult financial environment. At the same time the demand for our services is going up, the flow of revenue from the traditional funding sources is becoming more sluggish."
  For Keating, some answers can be found in expanded funding sources and myriad counseling services, including targeting those consumers most likely to experience high debt loads-young adults and senior citizens. Add up the pressures on credit counselors today, which include growing Internal Revenue Service pressure, shrinking creditor funding and desperate customers, and it points to an industry in turmoil.
  "A perfect storm is brewing, pushing and pulling in all directions," says the literacy institute's Linfield. Many industry insiders, including Linfield, predict that debt-management programs will become a for-profit enterprise within the next few years, and that the non-profit firms will start having to pay taxes.
  But out of this perfect storm could emerge a more stable industry, depending on how deep and responsive alternative funding models turn out to be. One thing is certain, however. As Americans' debt levels continue their steady climb, credit counseling services are more in demand than ever.
  Now all the counselors have to do is figure out how to make a living while also complying with the new bankruptcy law.
  A SAMPLING OF MAJOR COUNSELING AGENCIES
  ClearPoint Financial Solutions - Richmond, Va.
  Consumer Credit Counseling Service of Greater Atlanta Inc. Atlanta - 18 offices.
  Credit Advisors Foundation - Omaha, Neb. - 2 offices.
  Credit Counseling Centers of America - Dallas.
  Debt Reduction Services - Boise, Idaho - 13 offices.
  Greenpath - Farmington Hills, Mich.- 38 offices.
  Hummingbird - North Carolina.
  Mostly Internet and telephone counseling.
  Institute for Financial Literacy - Portland, Maine.
  Mostly Internet and telephone counseling.
  Money Management International - Houston - 145 offices.
  Novadebt/Garden State - Freehold, N.J. - 9 offices.
  Springboard - Riverside, Calif. - 15 offices.
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