February 13, 2006
Consumer Credit Counseling
Posted by Ronald Mann

Bob Hunt (an economist at the Payment Cards Center at the Federal Reserve Bank of Philadelphia) has this recent paper about consumer credit counseling.  This is a fascinating subject right now.  For one thing, his paper (like some recent work by Michael Staten at Georgetown) illustrates a big shift in the business models of credit counseling agencies in the last fifteen years.  In the old days, these agencies subsisted on so-called "fair share" payments -- voluntary contributions of creditors, in the range of 15% of the total payments that borrowers made under repayment plans arranged by the agencies.  Those contributions far exceeded the costs that the agencies incurred in arranging repayment plans, and generally were used to subsidize credit counseling designed to encourage budgeting responsibility.  Hunt recounts the rise in the last fifteen years of larger more automated companies that focus solely on arranging repayment plans, skimping on (or skipping entirely) the labor-intensive and time-consuming counseling.  Those companies, in turn, can compete for business by accepting lower fair-share payments, which in turn makes it harder for the older-style agencies to continue to provide counseling.

At the same time as economic pressures make it harder and harder to provide counseling, a cornerstone of the recently enacted bankruptcy reform bill is a provision that makes credit counseling an absolute requirement for consumers attempting to file bankruptcy.  The premise of that legislation is that a lot of irresponsible consumers would stay out of bankruptcy if only they could get some objective advice about financial responsibility before they filed.  Those provisions, of course, sparked the much-blogged opinion by Judge Monroe a few weeks ago.  But I want to offer a slightly different perspective on those provisions.  Ordinarily, they are viewed as something of a detail by comparison to the much more widely criticized "means-test" provisions.  To me, however, it is things like the credit-counseling and attorney-certification provisions that are the most likely to provide creditor benefits.  Those provisions will have the natural effect of increasing the cost of, and thus delaying, consumer bankruptcy filings.  If, as seems likely, the typical consumer bankrupt keeps paying as much as is possible until shortly before the bankruptcy filing date, provisions that push off bankruptcy filing by 30-90 days might often give unsecured creditors (principally credit card issuers) 1-3 months of additional payments before the bankruptcy filing.  That is a much more direct and significant benefit than anything they reasonably can hope to get from the means-test provisions, which will generate large administrative costs borne by the taxpayers, balanced by additional revenues for creditors in a very very small number of cases.

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