Like HowStuffWorks on Facebook!

How the Uniform Debt Management Services Act Works

Why Pass the Uniform Debt Management Services Act?
Getting into credit card debt is much easier than getting out of it.
Getting into credit card debt is much easier than getting out of it.
Martin Poole/Digital Vision/Getty Images

In the late 1980s and 1990s, a robust economy led to a rise in consumer income. Credit card issuers became more lax in giving credit, leading to an increase in credit card debt. The amount of debt continued to rise, with more people beginning to default on their debt. In came the debt management agencies.

In many cases, debt management firms helped consumers get their finances back on track. However, as the total number of agencies grew, so did the number of dishonest agencies.

Consumer advocacy groups realized that not all of these agencies were operating in the customer's best interest. In some cases, people would have been better off making payments themselves. Sometimes the best plan would have been declaring bankruptcy, but counselors wouldn't mention that as an option, because it wouldn't put any money in the counselors' pockets. In other cases, agencies said they were nonprofit but then charged very high fees.

The Consumer Federation of America and the National Consumer Law Center conducted studies and found the main problems to be:

self-dealing and other conduct by agencies to evade limitations in the Internal Revenue Code."

[source: NCCUSL]

People had assumed that these agencies were looking out for the consumer, but that assumption was less and less accurate. The study found that debt management plans were becoming more expensive, even if they were from nonprofit agencies. It also found that credit counselors weren't educating consumers [source: Witzel]. People could choose the wrong debt solution -- or even worse, never get out of debt -- because without education, they didn't know how to change their financial habits.

As a result of the studies, the NCCUSL formed a drafting committee to create a uniform law. Consumers' growing debt and the lack of regulation among states were creating a recipe for disaster. A more uniform law would not only help consumers, but also allow the industry to be more easily regulated.

The NCCUSL issued the act in July 2005, making it the first effort to provide some national rules. Since then, several states have passed the act, while several others have introduced it into their legislature.

See the next page to find out which states have adopted the act and some of its benefits to consumers.