Living with credit

Lengthy wait for debt repayment plan hurts struggling debtors

Fred Williams

Overwhelmed by credit card debt, you call a nonprofit credit counseling service for help. Here’s what happens:

  1. You spill the details of your income, debts and resources.
  2. The counselor helps you draw up a budget and pitches a repayment plan to creditors.
  3. You wait, fending off collection calls the best you can.
  4. You wait some more, while ads for bankruptcy lawyers look more and more appealing.

Taking the waiting out of the debt management plan is an initiative of the National Foundation for Credit Counseling. Susan Keating heads the NFCC, one of the two industry associations that represent nonprofit credit counselors. She is on a mission to cut the time between “help!” and “relax.”

“If someone is working with a counselor, they’ve basically called the 911 line,” Keating said. But their emergency collides with a waiting period that can last weeks — sometimes a month or more. “Many clients leave, they get discouraged,” she said. They may opt to erase debts in bankruptcy, sinking their credit for the next decade. Or they might be sucked in by the promises of debt settlement companies on late-night TV, and wind up further in the hole.

Defaults on loans are at record lows, but that doesn’t mean people aren’t struggling. More than 1 million people a year come to NFCC agencies for help, Keating said. Counselors say they often see people who are up to date on their payments, but who can only make minimum payments — a long and costly debt trap.

Debt management plans reduce interest rates and fees on unsecured debt. The amount you can afford to pay is deducted from you paycheck and the counseling agency handles payments to creditors.

But multiple creditors have to get on board. When a cardholder gets into trouble, a bank’s first instinct is to grab as much of its money back as it can. If it doesn’t, other creditors will, the bank figures. So getting all unsecured creditors to work together is tricky.

“Say five proposals go out in a batch,” says Kevin Weeks, president of the Financial Counseling Association of America. “If one comes back rejected and four come back approved, you’ve got to deal with that rejected one.”

Weeks, who heads the other major industry group for nonprofit credit counselors, said that speeding up the application and approval process for debt management plans isn’t a priority for agencies that belong to the FCAA. The process is already fast, he said, as information is shared electronically over the MasterCard RPPS system, a remote presentment and payment service that serves as an information hub for banks. But reviewing the debtor’s information still takes time.

“Every creditor is different,” Weeks said. “It’s unrealistic to assume every creditor is going to rubber-stamp what you send them.”

Keating’s view of the situation contrasts sharply. She called the DMP process “almost broken,” saying that current turnaround times hamstring counseling agencies and hurt consumers.

Her idea is to standardize applications and approvals for workout plans. Counselors would collect all the data and documentation that creditors want to see. If an application fills all the blanks, creditors would offer preapproved payment plans in three sizes: principal payback of 2 percent per month; 2.25 percent, or, in dire cases, as little as 1.75 percent. Standard caps on interest rates would also apply. The off-the-rack plans could be complete in a fraction of the time that a tailored plan takes, Keating said — potentially within a day.

A few creditors have set up their computer systems to work with the streamlined applications, Keating said, and more should be coming on board next year. “We think more clients would be eligible if we had this consistent approach,” she said. Only about a quarter of people who seek help manage to enter a workout plan. Some are turned away because they can manage their own repayment, but there are some who drop out. “If someone is looking to get help and is being responsible,” Keating said, “they shouldn’t still be under pressure, getting calls from collectors.”

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