By Andrew Housser

Last October, Congress passed bankruptcy reform legislation that made it significantly harder for Americans to file for Chapter 7 bankruptcy protection. Now, the Internal Revenue Service has narrowed further the options of people contemplating bankruptcy by stripping many credit-counseling firms of their tax-exempt status, based on abuses found by the agency.

Following the IRS’ January announcement that it is revoking the tax-exempt status of credit-counseling firms responsible for nearly 50 percent of the industry’s revenue, consumers with unmanageable debt face an increasingly arduous course.

During 2005, the Federal Trade Commission and Internal Revenue Service initiated a crackdown on credit-counseling firms that engage in unlawful trade practices or abuse nonprofit status. The IRS already has revoked the nonprofit status of five firms, and the agency has notified 30 more firms that they will lose their tax-exempt status as a result of the latest investigations. The timing couldn’t be tougher for consumers.

The problem is that bankruptcy reform legislation which went into effect last October mandates that consumers who file for bankruptcy protection obtain debt counseling from an approved non-profit agency within six months prior to filing. Many states require that credit-counseling agencies be nonprofit organizations. While the action by the IRS to revoke offending agencies’ not-for-profit tax status is the right thing to do, consumers will have difficulty in meeting the requirements of the bankruptcy laws – and therefore lose the ability to declare bankruptcy or get help with their debt from these traditional sources.

The continual tightening of the bankruptcy and credit counseling industries comes at a time when consumers are feeling the squeeze from other economic pressures as well.

• The Federal Reserve has raised interest rates more than a dozen times; credit card companies have responded with punitive annual percentage interest rates of more than 30 percent for customers who have missed or been late with payments.
• New policies on credit card minimum payments have raised minimum payment requirements from 2 percent to as much as 4 percent of balances, resulting in doubled minimum payments for many customers.
• This winter has seen the highest natural gas and fuel oil prices in recent memory, forcing some consumers to choose between utilities and debt payments.
• Home price appreciation is slowing for the first time in several years in many parts of the country.

Although bankruptcy remains a last resort for some consumers in debt hardship, other options do exist.

• Chapter 13 bankruptcy – The new law applies only to Chapter 7 bankruptcy filings, which typically erase all unsecured debt. Chapter 13 bankruptcy protection option – basically a restructure/repayment of debts – is still available.
• Creditor negotiation – Consumers who cannot make even minimum payments on bills can try calling creditors and asking for temporary hardship status. Some creditors may work out payment plans.
• Debt resolution – Debt resolution firms negotiate with creditors on the consumer’s behalf to lower principal amounts due – rather than just interest rates – as well as lower monthly payments and avoid the negative credit impact of a long-term bankruptcy judgment. For those consumers who do contemplate a Chapter 13 bankruptcy filing – which establishes a repayment plan rather than wiping out all debt – the debt repayment plans that a debt resolution company obtains almost always will be more favorable to the consumer than those resulting from Chapter 13 filings, often saving consumers up to half the total amount they owe. Consumers then pay the debt resolution firm a percentage of savings obtained. 
  

Andrew Housser is co-CEO of Freedom Financial Network, LLC, a national consumer debt resolution firm serving more than 4,000 clients and managing more than $120 million in consumer debt. Housser holds a master of business administration degree from Stanford University and bachelor of arts degree from Dartmouth University.