Where Has Credit Counseling Been on Pushing Ahead Alternative Dispute Resolution From BAPCPA 2005?

Every had one of those times when something pops into your head and makes you say to yourself, “Why?” Recently I had an opportunity to look at a copy of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. I know, I know, not the kind of light reading you normally pick up.

I was looking up something else but then I came across section 201 of the act titled SEC. 201. PROMOTION OF ALTERNATIVE DISPUTE RESOLUTION. To be honest I had forgotten about this section for a long time. Nothing was ever done about it and spotting it again made me wonder why nonprofit credit counseling groups have not been trying harder to put this provision in place to help consumers reduce the amount they owe and avoid bankruptcy.

Here is what it says:

  • (k)(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, 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.
  • (2) The debtor shall have the burden of proving, by clear and convincing evidence, that–
    • (A) the creditor unreasonably refused to consider the debtor’s proposal; and
    • (B) the proposed alternative repayment schedule was made prior to expiration of the 60-day period specified in paragraph (1)(B)(i).’.

What That All Means

This section says that a nonprofit budget and credit counseling agency may negotiate a reduction in the amount that you owe so that you are only repaying 60% of the debt over a 60 month repayment plan. If they did this it would then give consumers the breathing room they need to possibly avoid bankruptcy.

The cynical side of me says that credit counseling groups have not been forceful in moving this forward because they don’t want to make the creditors mad and potentially jeopardize their funding. Again, it comes down to who is working for whom.

Of course, while allowed and permitted under the law, this section has no real teeth in it to punish creditors that don’t negotiate in good faith. A 20 percent reduction in the claim is pointless in a no asset Chapter 7 bankruptcy and just a bit less than pointless in a Chapter 13 case.

But what is interesting is the the legislators thought that a nonprofit budget and credit counseling agency could or should negotiate the balance owed. Right now, credit counseling agencies do not negotiate any reduction in the amount due and under credit counseling creditors receive the full amount due plus interest over the life of the repayment plan.


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