November's Top Compliance Question: Are Collectors Required to Negotiate with Credit Counselors?

Published: Friday, December 16, 2005

The top compliance question received by ACA's Compliance Department for the month of November was regarding the requirement of debt collectors to negotiate with credit counselors under the amended Bankruptcy Code. Section 109(h) of the amended code requires that all individual consumers who wish to file for bankruptcy must participate in an approved credit counseling program within six months of filing. This requirement that consumers must now participate in credit counseling comes with a requirement for debt collectors.

Section 502 of the Bankruptcy Code requires that creditors must work with credit counseling companies to negotiate reasonable payment schedules. If a creditor refuses to work with the consumer's credit counseling company, their proof of claim could be reduced by up to 20 percent. While this section refers to creditors, an unreasonable refusal of a collection agency working on behalf of a creditor could be imputed to the creditor.

As such, debt collectors who in the past refused to communicate with credit counseling companies will be required to work with them or risk having their creditor clients' claims reduced. This section does not mean that all offers from a credit counseling agency must be accepted. Rather, it requires that a debt collector participate in negotiations to reach a "reasonable" repayment schedule. The only clarification offered to define "reasonable" is that the terms of the repayment schedule not exceed the repayment period of the original loan, or a reasonable extension of it.

Nonprofit budget and credit counseling agencies qualified to provide the required credit counseling must be approved by the U.S. Trustee. A list of all credit counseling agencies approved by the U.S. Trustee will be maintained by the clerk of court. A list of U.S. Trustee approved credit counseling agencies may be found at http://www.usdoj.gov/ust/bapcpa/ccde/index.htm.

Additionally, with the new requirements of the Bankruptcy Code, debt collectors need to ensure they are still in compliance with the Fair Debt Collection Practices Act (FDCPA) and third-party disclosure requirements.

A credit counseling company that is assisting a consumer in developing a debt management plan or negotiating a repayment schedule would be considered a third party under the FDCPA. Therefore, a collector should obtain the consumer's permission prior to speaking with a credit counseling agency. Written authorization is the safest and most thorough way to receive authorization to speak with a third party.

ACA recommends receiving written authorization before speaking with any credit counseling agency working on behalf of a consumer. However, that is not always feasible. If the collector is only able to obtain verbal authorization, the collector must maintain a record of that authorization.

Please see E-Compliance document # 364 for more information on this topic.

This article is provided by ACA International's Legal and Government Affairs Department.