New bankruptcy law makes counseling mandatory

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The average household in America now has nearly $10,000 in credit card debt. One in three families have a home equity loan in addition to their first mortgage. Americans are saving at a lower rate than ever before. As a society, we are spenders, rather than savers, and sometimes that spending gets us into trouble. Fortunately, there are a number of services available to the financially troubled, including advisors who can assist and educate consumers about managing money.

Credit counseling has been available for years, and thousands of consumers have benefited from the service. A distinctly different service from debt consolidation, credit counseling educates those with problem debt about the many aspects of money management. Our school system is inadequate when it comes to teaching our children about such matters as balancing checkbooks, paying bills on time and in full and managing bank accounts.

By educating consumers about these topics and others, those in the credit counseling industry hope to minimize problem debt. Anyone who is in a financial bind and thinks they may benefit from this valuable service should hurry. A number of different factors are converging in a way that the industry could soon be overwhelmed with more clients than it can adequately assist.

The recently passed Bankruptcy Abuse and Consumer Protection Act, designed to eliminate abuse of Federal bankruptcy law, requires anyone filing for personal bankruptcy to undergo credit counseling beforehand. There are some problems with this, including the fact that personal bankruptcy filings are often business failures, but this alone will increase the phone calls to counseling services. By requiring this service as a condition of debt relief, Congress is hoping to minimize the number of repeat filers after the law takes effect in October 2005.

Another law, passed in 2003, requires credit card companies to establish repayment schedules that permit paying off balances in a reasonable amount of time. It has taken some time for the industry to make the necessary adjustments, but as of this spring, many consumers have seen their minimum credit card payments double.

For a household with the average card debt of $10,000, this increases the minimum monthly payment to $400 per month, a figure that many cannot afford. This hike in the minimum payment may force more consumers into bankruptcy.

Adding to the mix is the large number of consumers who have high-risk mortgages, including the fairly new interest-only variety, which does not require any payment on the loan principal for up to five years. Should interest rates increase, home prices fall, or should both happen at once, tens of thousands of homeowners could default on their loans. As many markets have housing prices that are already on the brink of unaffordability, this scenario seems likely to occur soon.

This is a critical time for those in the business of providing advice to the financially challenged. A rare combination of factors could push many more consumers towards counseling than the industry can adequately handle. Any one with problem debt who might benefit from such help is advised to seek it quickly.

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