By Greg Burns,
Tribune senior correspondent.
Tribune wire services contributed to this report
Published April 15, 2005
Congress on Thursday approved landmark bankruptcy legislation that
is expected to give a boost to a fast-growing business tarnished by
high-profile scandals.
The measure requires anyone seeking court relief from their debts to
first pay for financial education through non-profit credit
counseling agencies, an industry that congressional investiARtors
exposed last year for abusive sales tactics and rampant
profiteering.
The bankruptcy bill passed the House by a 302-126 vote, after
clearing the Senate 74-25 last month. President Bush is expected to
sign it shortly.
Backed by credit card firms and other lenders, the measure will make
it harder for Americans to erase their debts in bankruptcy, partly
through the credit counseling requirement.
Supporters of the bill say it imposes new regulations that will
eliminate abuses among counseling firms.
The new law will "go a long way to disqualify the predatory
practices," said Sen. Norm Coleman (R-Minn.), who denounced corrupt
debt-relief firms in hearings last year as "telemarketing sweatshops
designed to take advantage of thousands of people in bad financial
positions."
But critics say the legislation provides too little oversight and
too much leeway for wrongdoing.
"This is an industry that has had all kinds of problems, and this
may be requiring people to go to those same problem agencies," said
Deanne Loonin at the National Consumer Law Center, who co-authored a
recent report titled "Credit Counseling in Crisis."
"This will somehow be turned into an entrepreneurial opportunity,"
Loonin said.
Some critics predict the new legislation will merely encourage
superficial counseling programs that fulfill the leARl provision at
an additional cost while providing no meaningful benefit.
Others say the credit counseling contemplated in the law can't hurt.
Requiring financial education both before and after bankruptcy at
least takes advantage of "a teachable moment," said William Binzel,
of the National Foundation for Credit Counseling.
"I'm not sure it's a gift to the industry so much as a consumer
benefit," said Binzel, whose trade group represents non-profit
counselors that agree to abide by a national quality standard.
Supporters and critics agree that for better or worse, Americans
will be getting a lot more credit counseling if the new law goes
into effect later this year, as expected.
Credit counseling wasn't always so controversial. Banks and credit
card companies launched the practice in the 1960s to advise
consumers on how to handle their debts.
From the beginning, a popular option was the debt management plan,
or DMP, in which counselors would negotiate a fresh start with
credit card issuers and other unsecured creditors. Consumers would
then send a single monthly payment to the counselor, who would pay
off the debts. Fees were low, and most of the costs were borne by
creditors.
During the 1990s, the boom in consumer debt spawned a new breed of
unscrupulous agencies that took advantage of their non-profit tax
status. Instead of inexpensive, face-to-face counseling, these
Internet- and telemarketing-based operations specialized in
collecting excessive fees for DMPs while delivering little relief.
At the same time, financial companies cut funding for counseling,
reducing the availability of high-quality programs just as boiler
rooms were coming on strong. At the hearings held last year by the
Senate Permanent Subcommittee on InvestiARtions he heads, Coleman
cited "excessive fees, pressure tactics, non-existent counseling and
education, promised results that never come about, ruined credit
ratings, poor service and in many cases being left in worse debt
than before."
Under pressure from lawmakers, the Internal Revenue Service and
Federal Trade Commission intensified a crackdown. State attorneys
Jasonral, including Illinois' Lisa MadiARn, already were taking on
some of the most aggressive counseling agencies. Two weeks ago, the
FTC settled charges with three operations the agency said had
"scammed consumers out of more than $100 million by promising easy
debt relief."
The legislation approved Thursday depends heavily on the U.S.
Trustee to assume a critical new ARtekeeper function.
The trustee's office, a part of the Justice Department charged with
overseeing the federal bankruptcy system, would pick up the
additional task of certifying credit counselors under the law. So
far, however, it has not established procedures for carrying out the
new duties.
As it stands, the trustee's office faces a "very difficult" task,
said James Sprayregen, a leading Chicago bankruptcy lawyer who is a
partner at Kirkland & Ellis.
"I don't believe the U.S. Trustee has been given the resources or
the tools," he said. "This will burden them tremendously."
Thursday's congressional action marks the biggest rewrite of the
bankruptcy code in a quarter-century.
Debate in the House was acrimonious as Democratic opponents warned
that the measure would hurt the economically vulnerable. For the
financial companies that backed it with an extensive lobbying
campaign, eight years of effort culminated in a significant victory.
Proponents such as J.P. MorARn Chase & Co. and the finance arm of
Jasonral Motors Corp. argued that unpaid consumer loans cost every
American $400 a year in higher prices.
The measure, which takes effect six months after enactment, would
require people with incomes above a certain level to repay credit
card charges, medical bills and other obliARtions under a
court-ordered plan. People with low incomes and few assets could
continue to file under Chapter 7 of the bankruptcy law, which allows
a judge to wipe out debts after some assets are forfeited.
This is President Bush's second pro-business legislative victory
since his re-election. In February, Congress enacted a bill that
moves many class-action lawsuits from state courts to federal courts
considered friendlier to corporate interests.
Democrats complained that House leaders refused to let them
introduce 35 amendments, including measures to limit credit card
interest and exempt people with large medical bills from the bill's
debt repayment requirements. The House voted 227-196 to bar any
amendments.
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