Marking the six month anniversary of bankruptcy reform, the National Foundation for Credit Counseling (NFCC) reported today that its member agencies are fulfilling the mandate of the 2005 Bankruptcy law by counseling more than 188,000 American consumers facing bankruptcy since the law took effect on October 17, 2005. NFCC members account for 70 percent (over two-thirds) of all credit counseling agencies approved by the Department of Justice to provide pre-filing counseling for individuals considering bankruptcy.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), individuals are required to take part in a credit counseling session before they can file for bankruptcy. They also must take a financial management course before their debts are discharged. The survey data, to be released as part of a full report on April 19, reflect sessions provided between October 17, 2005 and March 24, 2006, just over five months since the law took effect. The NFCC survey was conducted between March 28 and April 3, 2006 and respondent agencies represent more than 90 percent of the NFCC's financial counseling volume.

Bankruptcy Sessions Account for More than One-Third of Financial Counseling Workload

Pre-filing counseling now accounts for more than one-third of NFCC agencies' total financial counseling workload, according to the survey. During the past five months, these agencies counseled a total of 508,650 American consumers, including 187,967 individuals considering bankruptcy. A total of 132,398 new consumer bankruptcy petitions were filed during the same period. After counseling, individuals may decide not to file for bankruptcy and may wait as long as six months before actually filing for bankruptcy. In addition, while BAPCPA requires each individual on a personal bankruptcy petition to obtain counseling, a married couple may file a single petition jointly.

Bankruptcy filings soared to a record 2.04 million in 2005 as consumers rushed to file in the final weeks before the new law took effect. Since that time, filings have fallen to the lowest levels in two decades. But, given historic trends and with consumer debt rising, it seems unlikely that these low rates will be sustainable in the months ahead.

Bad Money Management is Main Reason for Financial Problems

The survey found that the total debt of individuals receiving pre-filing counseling substantially exceeded their annual income and that the biggest single reason consumers find themselves facing bankruptcy is poor money management (41 percent), followed by loss of income (34 percent) and medical expenses (14 percent). While the same reasons are prevalent in regular budget and credit counseling, the proportion of counseling recipients who have a hard time managing money is significantly higher (68 percent).

According to survey respondents who provided debt and income data, individuals who received pre-filing counseling had average debts of $40,673 and an average income of just $31,255. The average debt for those who sought regular counseling was about half as large at an average of $20,997.

The survey made clear that, on average, client fees to counseling agencies do not cover the full cost of providing the bankruptcy counseling sessions. Susan C. Keating, president and CEO of the NFCC, expressed concern that this "counseling funding gap" is causing a migration away from the traditional way that counseling services have been provided and that consumers might lose the option of obtaining in person face-to-face counseling unless the nonprofit counseling agencies are able to secure additional funding.

Keating noted that for many consumers, the funding gap may already be reducing options.

Phone and Internet Counseling Dominate; Agencies Face Funding Squeeze

Just over six of 10 (61 percent) bankruptcy counseling sessions took place over the telephone during the law's first five months, according to the NFCC survey. Internet counseling accounted for 26 percent of counseling sessions. Only slightly more than 1 in 10 (13 percent) of pre-filing sessions provided by NFCC member agencies involved face-to-face counseling. Although some agencies still provide nearly all sessions in person, others have virtually eliminated face-to-face sessions because of the cost of providing in-person services - a trend that Keating considers a potentially serious loss for consumers.

"Our members deliver quality service whether by phone, Internet or in-person, but the public interest demands that consumers have the widest possible range of choices, and access to services that best meet their needs," Keating said. "For some individuals and in some circumstances, face-to-face counseling may be the most effective and that option must remain available."

But she conceded that economics may dictate otherwise.

The NFCC estimates that across channels of delivering counseling services, the average counseling session costs an agency $50.96. The average fee that an agency receives from the consumer for that session is $37.71, leaving a shortfall of $13.25 for each session that is provided. In view of most debtors' inability to pay higher fees, as well as the requirement that agencies provide bankruptcy counseling without regard for the debtor's ability to pay for it, the agencies have little or no ability to raise fees to a level that fully covers costs.

Some Agencies Already Divert Resources to Meet Bankruptcy Mission

The survey also found that because of this "counseling funding gap" that some member agencies have been diverting resources from other counseling services and financial education programs to fulfill bankruptcy counseling obligations. Others report that waiting times have grown for non-bankruptcy counseling sessions. For example:

-- One agency was forced to delay the start of a new Financial Empowerment Program because "the labor and financial resources needed to implement this program had to be redirected to provide bankruptcy counseling and education." "Lack of funding and the high volume prohibits available appointments for traditional credit counseling," another agency reported.

-- For a time, another agency shifted appointments from face- to-face to phone counseling to handle demand, and said "lack of funding to put in place counselors" was a factor.

For more information or to receive a copy of the full report to be released on April 19, contact Bob Ensinger at (301) 576- 2544 or rensinger@nfcc.org.

The NFCC, founded in 1951, is the nation's largest and longest serving national nonprofit credit counseling organization. The NFCC's mission is to set the national standard for quality credit counseling, debt reduction services and education for financial wellness, through its member agencies. With nearly 1,000 community-based offices nationwide, NFCC members help two million households annually. For free and affordable confidential advice through an NFCC member, call 1-800-388-2227, (en Espanol 1-800- 682-9832) or visit http://www.nfcc.org.

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Source: usnewswire