"Creditors, Be Prepared for Credit Counseling Requirements"
by Bev Evancic, CRS2005 Roundtable Discussion Leader
Creditors have less than 180 days to prepare for the changes in the Bankruptcy Code that will be enacted through The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Some of the changes will require modifications to the current operational procedures. During the afternoon sessions at the
Bankruptcy Educational Forums for Creditors, industry experts will discuss possible operational enhancements and changes that will be necessary to comply with the changes in the Bankruptcy Code.
One substantial change for debtors and creditors is the requirement for debtors to receive credit counseling before filing bankruptcy and again before a discharge is granted. In an effort to force debtors and creditors, particularly unsecured creditors, to work with the approved non-profit budget and credit counselors the Act also has a provision that unsecured creditor s claims may be reduced by up to 20 percent if within 60 days prior to the filing the unsecured creditor refused to accept a reasonable alternative repayment schedule proposed on behalf of the debtor by an approved nonprofit budget and credit counseling agency.
Counseling Prior to Filing
Preliminary Considerations
According to the Act:
|
An individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved non-profit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.
|
This provision may mean creditors will experience an increase in the volume of debtors going through debt management plans with credit counseling agencies. With the increase in volume, creditors also will experience an increase in fair share payments (if your company participates in the fair share program). Credit counseling accounts typically require additional FTE to review and accept/reject proposals, remove accounts from the normal stream of collections, monitor accounts to ensure payments are received as agreed and distribute fair share contributions (if applicable).
Creditors may also encounter an increase in preference payment claims for debtors that are not able to complete the debt management plan and file bankruptcy. The expenses associated with a preference payment claim include:
- Payment of the claim
- Payment of the claim and loss of the fair share amount paid to the credit counseling agency
- Salaries, benefits and fees paid to contest the claim and/or negotiate terms
List of Nonprofit Budget and Credit Counseling
The clerk is to maintain a list of the approved nonprofit budget and credit counseling agencies and the district court may, at any time, remove from the approved list (agencies).
Creditors will need to develop procedures to ensure that the most recent list of approved nonprofit budget and credit counseling agencies are available. The creditor will also need to develop procedures on how to work with agencies outside of the approved list and for the for-profit agencies.
The creditors may become the industry watch dogs for identifying agencies that may not meet the requirements for a nonprofit budget and credit counseling agency as outlined in the Act. There will be many new agencies entering the marketplace and many overwhelmed existing agencies. Debtors will more than likely register complaints about an agency with the creditor. The creditor may need to document complaints to understand if there are consistent concerns raised about specific agencies. Recent reports have questioned certain practices of nonprofit agencies. Some of the practices questioned include:
- Excessive fees for set up and monthly maintenance of a debt management plan
- Not clearly identifying that the first payment will be applied to fees and not disbursed to creditors
- Associations with for-profit companies
- Lack of financial counseling and education for debtorsn
- Inadequate training for counselors
Nonprofit agencies are typically members of National Foundation for Credit Counseling, (NFCC) and/or Association of Independent Consumer Credit Counseling Agencies (AICCCA). Both organizations have requirements for fees, mission, training, counseling, professional practices, etc. Creditors may need to report agencies that have multiple complaints by multiple debtors about the fees, payment distribution, financial education, etc. Additional information on nonprofit requirements may be found on the Association of Independent Consumer Credit Counseling Agencies; National Foundation for Credit Counseling; Council on Accreditation for Children and Family Services; and, the Internal Revenue Services Internet Sites.
Reduction in Unsecured Claim
Another aspect of the credit counseling provisions deals with the treatment of unsecured creditor s claims. An unsecured creditor s claim may be reduced by 20 percent if an acceptable payment plan proposed by an approved nonprofit budget and credit counseling agency was rejected within 60 days before the bankruptcy filing.
Unsecured Claims
The Act states:
- (1) The court, on the motion of the debtor and after a hearing, may reduce a claim filed under this section based in whole on an unsecured consumer debt by not more than 20 percent of the claim, and if-
- (A) the claim was filed by a creditor who unreasonably refused to negotiate a reasonable alternative repayment schedule proposed on behalf of the debtor by an approved nonprofit budget and credit counseling agency described in section 111;
- (B) the offer of the debtor under subparagraph (A)-
- (i) was made at least 60 days before the date of the filing of the petition; and (ii) provided for payment of at least 60 percent of the amount of the debt over a period not to exceed the repayment period of the loan, or a reasonable extension thereof; and
- (C) no part of the debt under the alternative repayment schedule is nondischargeable.
The average percentage paid to unsecured creditors varies, particularly by district, state and county where the debtor filed bankruptcy. If you have an unsecured portfolio and the accounts are fairly evenly distributed throughout the United States, then you probably collect an average of 18 percent of the account balance or claim amount. If you have a significant portion of accounts that have had repayment terms rejected as outlined in the Act, then you could experience a significant reduction in recovery results. If you sell bankrupt accounts, then accounts with a reduction in the claim may be returned as out of compliance. An increase in returned accounts by buyers may lead to a reduction in the selling price for future sales.
Prepare
There are less than 180 days to develop operational procedures that will ensure compliance and minimize risk to the business and recovery results. You must start thinking about how the changes in the Bankruptcy Code may impact your business. The Bankruptcy Forum for Creditors will provide the information you need to be knowledgeable on the changes and the possible impacts to your organization.
Bev Evancic will be hosting a roundtable discussion at Collection & Recovery Solutions 2005.
