The coronavirus pandemic’s looming credit crisis

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DISCLAIMER: As the COVID-19 public health situation evolves, new regulations are being continually issued. This page/story/information may not include the most recent information.

Widespread unemployment and economic hardships from COVID-19 will create a credit crisis that could further delay economic recovery.

Rebecca Steele – Opinion contributor USA Today 

As the nation slowly gets back to work over the coming months, millions of Americans will struggle to repay the debts that accumulated while they were jobless. Millions more will plunge into debt and suffer prolonged hardships. Once those unpaid bills become due — whether for rents, mortgages, medical expenses or student loans — these citizens will have to cope with lenders, credit card companies and others, all at the same time.

With 42.6 million Americans suddenly unemployed since mid-March, and expectations that economic hardships will persist for many workers and small business owners, our citizens will soon run severely short on lines of credit. These are the flight attendant next door, the single mom who’s an assistant hotel manager, and your friend who just opened a coffee shop. They will be at risk of falling further behind on their debts — first by weeks, then months and possibly years — inflicting a heightened state of fiscal instability.  

The magnitude of the crisis

The coming credit crunch will be unprecedented in magnitude. It threatens to trigger a tsunami of delinquent debt, bankruptcies and foreclosures that will overwhelm our courts and undermine our communities and financial institutions, delaying economic recovery even longer. Tens of millions of low- and middle-income families could be decimated.

These people — so many already living paycheck to paycheck, with bill collectors lurking outside the door — are now searching desperately for lifelines. Fraudulent activity frequently follows consumer debt crises such as this. Predator marketers and various for-profit debt settlement companies will dangle promises of fast, easy debt resolution. Already, individual calls to the credit industry have skyrocketed, an ominous trend sure to grow.

As in the 2008 mortgage crisis, American families now confront two challenges: They must contact overloaded creditors and develop repayment plans. In the aftermath of the 2008 debacle, it became clear that borrowers in this predicament desperately required help. In response, the federal government funded counseling that provided comprehensive guidance and a trusted source of advice. 

And as in 2008, today individuals and families need debt safety nets but don’t know where to turn for help. Even if hardship programs from lenders deliver temporary relief from monthly payments, these stopgap measures will fail to sustain long-term financial recovery. Strapped households will continue to face difficulty making well-informed decisions about options to repay creditors over the long haul.

Unless we combat this pending debt crisis with an approach that promises to be fair, comprehensive and unified, we’ll push an already vulnerable population off a cliff. 

Navigating the financial crisis

What people suffering financial distress need more than anything else is sound financial guidance. Credit counselors — nonprofit experts who advocate directly on behalf of people in need — have the debt management tools American families need to navigate these coming financial challenges.

Credit counseling is a proven solution for sustainable financial well-being, as demonstrated by a study from the Ohio State University. Individuals guided by nonprofit credit counseling agencies paid down more debt, increased savings, and better improved their credit health than did those who went without a credit counselor.

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In response to the COVID-19 challenge, the National Foundation for Credit Counseling, working closely with the Financial Counseling Association of America, has enlisted about 80 nonprofit U.S. credit counseling agencies, credit card companies and banks to launch a new, nationwide program for people in financial distress from the coronavirus. Leaders in the credit counseling sector coordinated closely with regulators, banks and creditors in developing a simple, specific scalable solution.

The central feature of the counseling emergency response program is an agreement to defer credit card payments for consumers suddenly unemployed. The next phase will enroll millions of individuals in debt management plans to provide sustainable long-term relief.

Credit counselors will steer their clients through multiple creditors, combining all obligations into a single payment, and restructure debt — averting potentially overwhelming demand on customer service channels. Counseled individuals will receive rapid support for all accounts at one time so they can get the information they need to make timely and informed decisions. These plans can prevent a wave of defaults and bankruptcies that could overwhelm our courts and financial system.

To ensure that the millions of Americans affected by the COVID-19 pandemic are able to work with a credit counselor, we need public support. Counseling should be integrated into the financial system at every turn, with lenders, regulators and state and local governments promoting centralized, easy access to counselors.

Federal regulators should take decisive steps to present credit counseling — and a single set of consistent guidelines — as the central approach for Americans running into financial hardship for both our current cataclysmic moment and the long term.

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Ideally, too, Congress will provide funding for counseling services for families and small businesses. At the moment, a bipartisan effort is underway in upcoming coronavirus relief legislation for just such a purpose. Sen. Jeff Merkley, D-Ore., and Sen. Steve Daines, R-Mont., recognizing the emerging crisis, are seeking to fund comprehensive credit counseling through a network of experienced nonprofit credit counselors. They’re calling for substantial federal support over two years, to be administered by the Treasury Department and earmarked for nonprofit credit counseling services. This appropriation would translate into direct counseling services for an estimated 5 to 7 million households. 

In a letter to congressional leadership, the senators said, “Access to credit counseling now and after the pandemic subsides stands as possibly as one of the most critical programs to mitigate financial hardship. If robustly funded, credit counseling agencies have the potential to serve as a resource for families and small businesses.” 

We must act to support American families suffering from a weakened economy and facing a looming bankruptcy crisis.

Rebecca Steele is the president and CEO of the National Foundation for Credit Counseling. She previously served in executive leadership positions at leading banking institutions.


Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

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