Legislation to reform the nation's bankruptcy laws has moved quickly through the U.S. Senate and was favorably voted out of the Judiciary Committee of the U.S. House of Representatives on Wednesday. In the legislation are requirements for standards of practice by credit counseling agencies providing services to consumers who must undergo a financial review and budget analysis before they are permitted to file for bankruptcy.

While the legislation (S. 256) addresses regulation of credit counseling for consumers seeking to file for bankruptcy, the bill does not address consumers using credit counseling agencies for financial assistance outside of bankruptcy.

Credit counseling is a reliable and proven method for consumers to become debt-free. Credit counseling organizations have a huge, positive impact on the American economy. Consumers want to honor their commitments to their creditors but, due to the circumstances, often need effective counseling and some concession from their lenders to regain their financial footing. AADMO estimates that the industry, just through debt management plans, directly returns more than $10 billion to the economy each year that might have otherwise been discharged in bankruptcy.

The credit counseling industry supports regulation by the federal government under a licensing program that sets reasonable standards for performance and protects consumers.

To that end, AADMO has developed draft legislation to help the Congress in its efforts to regulate the credit counseling industry. AADMO's proposed legislation far exceeds most of the state laws on the books and would mandate a license issued by the Federal Trade Commission (FTC), a highly protective level of bonding, a trust account for consumer money separate from operating funds, written contracts, mandatory disclosures, a written budget analysis to determine the appropriateness of the consumer as a candidate for service, and prohibit the negative amortization of any of the consumer's obligations to creditors.

According to Mark Guimond, Executive Director of the American Association of Debt Management Organizations (AADMO), a trade association for the credit counseling industry, "a single federal law would eliminate long-arm tests and other jurisdictional issues, keep unscrupulous operators from "cherry picking" states with no laws, and provide a coordinated and consolidated location for consumer complaints and inquire about agencies.

America's consumers are not protected by the patchwork of state laws in place. Some states regulate agencies physically located in their own state but have no authority over agencies located in other states. Some states require criminal background checks of personnel handling consumer funds, other states have no standards at all. Some states don't even have laws on this subject.

Congress is recognizing through bankruptcy reform that credit counseling agencies should be regulated on the federal level. They need to take the next step, preempt the states and regulate the industry through a single federal law. This is an interstate issue - the only way to protect consumers is through uniformity. We need to get rid of the contradictory state requirements and provide a level playing field. That's exactly what a federal law would do."