Bankruptcy Reform: Value of Credit Counseling Requirement Is Not
Clear (06-APR-07, GAO-07-203).
The Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 requires individuals to receive credit counseling before
filing for bankruptcy and to take a debtor education course
before having debts discharged. Concerns were raised that the new
requirements could expose consumers to abusive practices by
credit counseling agencies or become barriers to filing for
bankruptcy. GAO was asked to examine (1) the process of approving
counseling and education providers, (2) the content and results
of the counseling and education sessions, (3) the fees charged,
and (4) the availability of and challenges to accessing services.
To address these issues, GAO reviewed Trustee Program data and
application case files, and interviewed a wide range of
individuals and groups involved in the bankruptcy process.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-203
ACCNO: A67924
TITLE: Bankruptcy Reform: Value of Credit Counseling Requirement
Is Not Clear
DATE: 04/06/2007
SUBJECT: Bankruptcy
Credit bureaus
Debt
Debt collection
Investigations by federal agencies
Policy evaluation
Program evaluation
Reporting requirements
Standards
Strategic planning
Policies and procedures
DOJ U.S. Trustee Program
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GAO-07-203
* [1]Results in Brief
* [2]Background
* [3]The Trustee Program's Process for Screening Providers Is Des
* [4]Agencies Must Meet Statutory and Trustee Program Requirement
* [5]The Trustee Program Developed an Approval Process Designed t
* [6]Few Complaints Raised about Providers' Competence or Integri
* [7]Complaints Have Been Limited
* [8]IRS Is Examining Four Providers Approved by the Trustee
Prog
* [9]Counseling and Education Sessions Meet Statutory and Program
* [10]Credit Counseling Sessions Are Designed to Provide Debtors w
* [11]Most Credit Counseling Is Conducted by Telephone or Internet
* [12]Available Evidence Indicates That Prefiling Credit Counselin
* [13]Many Question the Value of the Credit Counseling Requirement
* [14]Debtor Education Sessions Are Designed to Offer Financial Ma
* [15]Provider Fees Are Generally Considered Reasonable, Although
* [16]Providers Must Charge Reasonable Fees and Provide Services R
* [17]While Providers' Fees Are Considered Reasonable, Fee Waiver
* [18]Trustee Program Has Not Issued Formal Guidance on Determinin
* [19]Supply of Providers Appears Sufficient and Actions Under Way
* [20]Enough Counseling and Education Services Exist to Meet Deman
* [21]In-Person Counseling Is Not Always Available, but Few Seek I
* [22]Steps Under Way to Address Challenges of Certain Populations
* [23]Non-English Speakers
* [24]Individuals With Special Needs or Circumstances
* [25]Debtors Without Attorneys Also Can Face Challenges
* [26]Conclusions
* [27]Recommendations
* [28]Agency Comments
* [29]Appendix I: Scope and Methodology
* [30]Appendix II: Implementation of Counseling and Education Prov
* [31]Appendix III: Comments from the Department of Justice
* [32]Appendix IV: GAO Contact and Staff Acknowledgments
* [33]GAO Contact
* [34]Staff Acknowledgments
* [35]Order by Mail or Phone
Report to Congressional Requesters
United States Government Accountability Office
GAO
April 2007
BANKRUPTCY REFORM
Value of Credit Counseling Requirement
Is Not Clear
GAO-07-203
Contents
Letter 1
Results in Brief 3
Background 5
The Trustee Program's Process for Screening Providers Is Designed to Help
Ensure Statutory and Program Requirements Are Met 9
Counseling and Education Sessions Meet Statutory and Program Requirements,
but a Wide Range of Observers Question the Value of the Counseling
Requirement 19
Provider Fees Are Generally Considered Reasonable, Although Fee Waiver
Policies Vary 28
Supply of Providers Appears Sufficient and Actions Under Way Address
Challenges Some Consumers May Face Fulfilling the Requirements 32
Conclusions 38
Recommendations 40
Agency Comments 41
Appendix I Scope and Methodology 44
Appendix II Implementation of Counseling and Education Provisions in
Alabama and North Carolina 48
Appendix III Comments from the Department of Justice 50
Appendix IV GAO Contact and Staff Acknowledgments 54
Abbreviations
FTC Federal Trade Commission
IRS Internal Revenue Service
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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copyright holder may be necessary if you wish to reproduce this material
separately.
United States Government Accountability Office
Washington, DC 20548
April 6, 2007
Congressional Requesters
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(Bankruptcy Act) amended the federal bankruptcy code to require (1)
individuals to receive budget and credit counseling from an approved
provider before filing a petition in bankruptcy and (2) bankruptcy
petitioners to complete an instructional course on personal financial
management in order to have their debts discharged.^1 According to the
legislative history of the act, one of the goals of the prefiling
counseling requirement, which became effective on October 17, 2005, is to
ensure that consumers understand the options available to them and the
consequences of filing for bankruptcy. However, the requirement raised a
number of concerns. In recent years, congressional committees and federal
agencies have investigated some credit counseling agencies for alleged
unfair and deceptive practices and were concerned that these practices,
which included steering clients into repayment plans that benefited
creditors and counseling agencies but not necessarily debtors, would
affect those filing for bankruptcy protection. In addition, some members
of Congress and other parties have been concerned that the cost and
availability of counseling and education services could serve as barriers
to those seeking to file for bankruptcy. In response to these concerns,
Congress included in the Bankruptcy Act requirements for providers of both
credit counseling and debtor education courses. The providers must meet
certain criteria and obtain approval from the Department of Justice's U.S.
Trustee Program (the Trustee Program), which oversees the bankruptcy
process for most federal judicial districts and acts to ensure compliance
with applicable laws and procedures.^2
1 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, S 106,
Pub. L. No. 109-8, 119 Stat. 23, 37-42 (2005) (amending various sections
of Title 11). For the purposes of this report, hereafter we refer to the
prefiling budget and counseling requirement as the credit counseling
requirement and the predischarge personal financial management course as
the debtor education requirement.
^2 In this report we use the term provider to refer to a provider of
prefiling credit counseling or predischarge debtor education that has been
approved by the Trustee Program. References to the Trustee Program in this
report refer collectively to the United States Trustees and the Executive
Office for United States Trustees.
In light of these issues, the objectives of this report are to examine (1)
the actions taken by the Trustee Program to approve credit counseling and
debtor education providers; (2) the content and results of the counseling
and education sessions; (3) the fees providers charge for counseling and
education services, and the extent to which these services are provided
regardless of clients' ability to pay; and (4) the availability of
approved counseling and education services and the challenges consumers
may face in receiving these services.
To meet these objectives, we reviewed relevant provisions of the federal
bankruptcy code as amended by the Bankruptcy Act and reviewed the Trustee
Program's written policies, rules, guidance, and procedures for approving
credit counseling and debtor education providers. We also collected and
analyzed data provided to us by the Trustee Program, including data on the
number, location, and characteristics of providers. To determine whether
the Internal Revenue Service (IRS) had revoked the section 501(c)(3)
tax-exempt status under the Internal Revenue Code, or taken other
enforcement actions, against providers, we met with IRS officials and
reviewed the agency's publicly available information. We also reviewed a
nonprobability sample of the Trustee Program's application case files for
43 providers that represented the majority of counseling and education
sessions conducted nationwide. We did not do a probability sample because
of the limited size of the sample we could review and because we wanted to
ensure that the small sample included all of the largest providers and
specific numbers of other types of providers. The case files we reviewed
included, among other things, the providers' initial applications,
protocols, curricula and other guidance used by counselors and
instructors, written materials and disclosures provided to consumers, fee
schedules, and correspondence between the providers and the Trustee
Program. To facilitate the case file review, we developed a data
collection instrument to record specific information for each case file
reviewed. We also reviewed relevant portions of the Federal Rules of
Bankruptcy Procedure and the standardized forms required by the courts to
file a bankruptcy petition. Further, we reviewed Web sites of selected
bankruptcy courts. We also collected information related to the prefiling
requirement from seven judicial districts and analyzed a survey of
bankruptcy judges that was conducted by the Federal Judicial Center.
Finally, we interviewed representatives of the Trustee Program; Federal
Trade Commission (FTC); IRS; Administrative Office of the United States
Courts; National Association of Attorneys General; American Bankruptcy
Institute; National Association of Consumer Bankruptcy Attorneys; National
Association of Bankruptcy Trustees; National Association of Chapter 13
Trustees; trade organizations representing creditors, such as the American
Bankers Association and the Financial Services Roundtable; consumer
organizations, such as the Consumer Federation of America and the National
Consumer Law Center; academic researchers; and 10 providers of credit
counseling or debtor education that had been approved by the Trustee
Program.
We conducted our review from February 2006 through March 2007 in
Washington, D.C., and Boston, Ma., in accordance with generally accepted
government auditing standards. A more extensive discussion of our scope
and methodology appears in appendix I.
Results in Brief
The Trustee Program's process for approving credit counseling and debtor
education providers was designed to ensure that applicants met statutory
and program requirements and demonstrated evidence of proficiency,
experience, and reputability. The Bankruptcy Act requires that providers
meet certain minimum requirements designed to help ensure that providers
are adequately qualified and to prevent conflicts of interest and abusive
practices. To implement these requirements, the Trustee Program adopted
application forms and an interim final rule that set forth application
procedures and criteria that credit counseling and debtor education
providers must meet. Relatively few concerns have been raised about the
competence of the providers approved thus far. Federal and state law
enforcement officials with whom we spoke did not identify enforcement
actions related to consumer protection issues against any providers
subsequent to their approval. As of March 2007, no provider approved by
the Trustee Program had had its federal tax-exempt status revoked, but
four providers' tax-exempt status was being examined by IRS. A Trustee
Program official said that the program had approved these four applicants
because, after careful review, the program was satisfied that they met the
statutory and program requirements for quality and character.
Our review of selected providers' application files, curricula, and
supporting materials showed that the content of the credit counseling and
debtor education sessions generally complied with statutory and Trustee
Program requirements. According to the Bankruptcy Act, prefiling credit
counseling sessions should provide an analysis of the client's current
financial condition and the factors that led to it, an individualized
budget analysis, and assistance in developing an appropriate action plan.
According to providers and Trustee Program data, the great majority of
debtors fulfill the credit counseling requirement by telephone or via the
Internet. We did not find evidence that agencies that provided prefiling
credit counseling discouraged clients from filing for bankruptcy and very
few clients appeared to be entering into repayment plans administered by
these agencies. However, it is not clear whether the prefiling requirement
is serving its intended purpose--as described in the Bankruptcy Act's
accompanying conference report--of helping consumers make an informed
choice about bankruptcy and its alternatives. Anecdotal evidence suggests
that by the time most consumers receive the prefiling counseling, their
financial situations are dire, leaving them with no viable alternative to
bankruptcy. As we have reported in the past, data on program outcomes are
essential for appropriate oversight and decision making. However, the
Trustee Program does not track and monitor the outcomes of counseling
sessions, including how often they are followed by a bankruptcy filing, in
large part because this is not required under the program's statutory
responsibilities. Better data on the outcomes of counseling sessions could
help program managers and policymakers determine how well the prefiling
requirement is serving its intended purpose. Finally, we found that
participants in the bankruptcy process and other experts believed that the
debtor education course was generally a useful tool to improve debtors'
financial literacy.
Although comprehensive data were not available, evidence from our review
suggests that counseling and education sessions typically cost about $50
or less, and industry observers and consumer advocates we spoke with
generally considered this amount to be reasonable. Providers' policies for
waiving fees varied and Trustee Program data on the three largest
providers showed significant variations in the proportion of clients whose
fees were waived--from 4 percent to 26 percent for credit counseling
sessions and from 6 percent to 34 percent for debtor education courses.
The Bankruptcy Act requires that providers charge reasonable fees and
offer their services without regard to an individual's ability to pay, but
does not specify what constitutes a "reasonable" fee or "ability to pay."
The Trustee Program did not promulgate rules or provide specific guidance
about what constitutes a debtor's ability to pay in order to give
providers the flexibility to respond to market conditions. However,
formalized guidance would help reduce uncertainty among providers about
when to waive fees and would provide a minimum benchmark for reducing or
waiving fees.
Despite initial concerns, enough counseling and education providers have
been approved to allow consumers to access these services relatively
easily and in a timely manner. As of October 2006, the Trustee Program had
approved 153 credit counseling and 268 debtor education providers. Three
large nationwide organizations represent about half of the market for both
of these services. In-person counseling and education are not readily
available in certain parts of the country, but even where these services
are available, the great majority of debtors seek to fulfill the
requirements by telephone or via the Internet. Anecdotal evidence suggests
that certain populations, such as those whose primary language is not
English, may face challenges accessing counseling and education services.
The Trustee Program is undertaking steps to make it easier to identify
providers that offer translation services and services in specific foreign
languages. Some individuals, particularly those not represented by an
attorney, file bankruptcy petitions without having met the prefiling
credit counseling requirement. Since the Bankruptcy Act became effective,
the bankruptcy courts have taken measures--on their Web sites and filing
forms--to make the prefiling requirement more conspicuous to filers.
Debtors who fail to fulfill the prefiling counseling requirement can face
a variety of consequences, such as a delay in receiving the automatic stay
that prevents creditors from continuing to seek payment.
This report makes two recommendations. First, in order to help
policymakers assess the value of the Bankruptcy Act's counseling
requirement, we recommend that the Trustee Program develop a mechanism
that would allow the program or other parties to track the outcomes of
prefiling credit counseling, including the number of individuals issued
counseling certificates who then file for bankruptcy. Second, to clarify
the Bankruptcy Act's requirement that the required counseling and
education be provided regardless of a client's ability to pay, we
recommend that the Trustee Program issue formal guidance on what
constitutes "ability to pay."
We provided a draft of this report to the Administrative Office of the
U.S. Courts, Department of Justice, and IRS, which provided technical
comments that we incorporated as appropriate. In addition, the Department
of Justice provided written comments, in which it concurred with our
recommendations and discussed its plans for carrying them out.
Background
Bankruptcy is a court procedure designed to help consumers and businesses
eliminate debts they cannot pay or repay them with the court's
protection.^3 The filing of a bankruptcy petition in most cases operates
as an "automatic stay" that essentially prohibits most creditors from
taking any action to attempt to collect a debt pending the resolution of
the bankruptcy proceeding. Consumers usually file for bankruptcy under one
of two chapters of the Bankruptcy Code. Under Chapter 7, the debtor's
eligible assets are liquidated (reduced to cash) and distributed to
creditors in accordance with the procedures mandated by the court. At the
end of the process, the debtor's eligible debts are discharged, which
means that creditors may take no further action against the individual to
collect the debt. Under Chapter 13, debtors file a repayment plan with the
court agreeing to pay their debts over time, usually 3 to 5 years. In
these cases, the debtor's discharge occurs upon completion of all payments
under the plan. Personal bankruptcy is designed to give debtors a "fresh
start" but is often considered a last resort, in large part because of the
adverse effect it has on an individual's credit record. Most debtors who
file for bankruptcy use an attorney, but some debtors represent themselves
without the aid of an attorney and are referred to as pro se debtors.
^3 Because businesses are not subject to the credit counseling or debtor
education provisions of the Bankruptcy Act, the scope of this report is
limited to personal bankruptcies.
Federal courts have jurisdiction over bankruptcy cases and petitions can
be filed in any one of the nation's 94 judicial districts.^4 The Trustee
Program, a component of the Department of Justice, is responsible for
overseeing the administration of most bankruptcy cases. The program
consists of the Executive Office for U.S. Trustees, which provides general
policy and legal guidance, oversees operations, and handles administrative
functions, as well as 95 field offices and 21 United States
Trustees--federal officials charged, among other things, with supervising
the administration of federal bankruptcy cases. The Trustee Program also
oversees private "panel trustees" and "standing trustees" who administer,
respectively, individual Chapter 7 and Chapter 13 bankruptcy cases.
Bankruptcy cases in Alabama and North Carolina are not under the
jurisdiction of the Trustee Program and are administered instead by
bankruptcy administrators in the judicial districts in those states. (See
app. II for more information on Alabama and North Carolina.)
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was
signed into law on April 20, 2005, and most of its provisions became
effective on October 17, 2005. The act made substantial changes to the
Bankruptcy Code, including the addition of new credit counseling and
debtor education requirements.^5
4 There are 90 bankruptcy courts among the 94 judicial districts. The
Eastern and Western Arkansas judicial districts are served by a single
bankruptcy court and bankruptcy cases in the Guam, Virgin Islands, and
Northern Marianas judicial districts are filed in district court.
o Credit Counseling. To be a "debtor" (that is, eligible to file
for bankruptcy), an individual, except in limited circumstances,
must receive from an approved provider, within 180 days preceding
the date of filing a bankruptcy petition, (1) a briefing outlining
the opportunities available for credit counseling and (2)
assistance with performing a budget analysis. Individuals may
satisfy the counseling requirement post-petition if the individual
certifies the existence of exigent circumstances that merit a
waiver.^6
o Debtor Education. Prior to discharge of debts, Chapter 7 or
Chapter 13 debtors must complete a personal financial management
instructional course from an approved provider.
The Bankruptcy Act has designated the Trustee Program as
responsible for the implementation of these requirements,
including the development of rules and guidance and the
certification of approved credit counseling and debtor education
entities. Upon completing prefiling counseling or predischarge
education, consumers get a certificate from the provider that is
submitted to the bankruptcy court as evidence of having fulfilled
the requirement.
The credit counseling industry has existed for about 40 years.
Credit counseling agencies generally work on behalf of their
consumer clients, who are typically deeply in debt, to help them
manage their existing financial problems and to teach them better
financial management skills for the future. These agencies have
historically been community-based nonprofit organizations that
charge nothing or solicit modest fees from clients to help defray
expenses. In some cases, agencies may offer to put clients in
repayment programs, commonly termed debt management plans, where
consumers pay off their unsecured debts by making a single,
consolidated payment that the agency uses to disburse funds to
creditors. Under such plans, creditors often agree to reduce the
debtor's interest rates or waive certain fees and to contribute a
small percentage of the amount received to the counseling agency
to help fund its expenses.
The FTC and others have noted that many credit counseling agencies
operate honestly and fairly and that these agencies are
professional operations that provide valuable services to
financially distressed consumers. However, starting in the 1990s,
consumer complaints about selected segments of the credit
counseling industry spurred congressional hearings and federal and
state investigations into the activities of many credit counseling
agencies.^7 For example, over the past few years, the FTC has
settled enforcement actions against several of these agencies for
alleged abusive practices, including steering consumers into debt
management plans that provided financial benefits to the agency
but not to the consumer.^8 Further, as part of its Credit
Counseling Compliance Project, IRS has undertaken a broad
examination effort of credit counseling organizations for
compliance with the Internal Revenue Code,
including the propriety of the organizations' tax-exempt
status.^9, 10 Between January 2005 and March 2007, IRS had revoked
or terminated the federal tax-exempt status of 19 credit
counseling agencies, and as of March 2007, IRS had proposed
revocations for an additional 28 agencies.^11
The Trustee Program�s Process for Screening Providers Is
Designed to Help Ensure Statutory and Program Requirements
Are Met
The Bankruptcy Act requires prefiling credit counseling and debtor
education providers to meet certain requirements designed to
ensure the quality of their services and prevent abusive
practices. The Trustee Program adopted application forms and an
interim final rule on procedures for approving applicants. Few
complaints have been raised about providers' competence or
integrity, although IRS is in the process of examining the
tax-exempt status of four providers.
Agencies Must Meet Statutory and Trustee Program Requirements
to Be Approved
The Bankruptcy Act provided that credit counseling and debtor
education agencies meet certain minimum requirements designed to
ensure that providers are adequately qualified and to prevent
abusive practices. With regard to credit counseling, the Trustee
Program may approve only entities that, among other things
o are nonprofit organizations;^12
o have an independent board of directors with the majority of
members not directly or indirectly benefiting financially from the
outcome of the counseling services;
o charge a reasonable fee for counseling services;
o provide full disclosure to a client on certain prescribed items;
o provide for the safekeeping and payment of client funds,
including auditing the trust accounts annually and bonding
employees;
o provide trained counselors with adequate experience; and
o have adequate financial resources to provide continuing support
services for budgeting plans over the life of any repayment plan.
The act required the Trustee Program to undertake a thorough
review of the qualifications of a credit counseling agency before
approving it to provide prefiling counseling services. Providers
are initially approved for a probationary period not to exceed 6
months; at the conclusion of this period, they must reapply and
the Trustee Program can approve them for an additional 1-year
period. In July 2006, the Trustee Program adopted an interim final
rule that set forth application procedures designed to ensure that
only organizations that met the minimum qualification standards
set forth in the Bankruptcy Act would be approved to provide
services.^13 The rule established criteria by which the Trustee
Program will evaluate whether applicants have satisfied the
statutory standards. For example, the rule specified factors that
indicate whether an applicant will be providing counselors with
adequate training and experience.^14 The rule also established
procedures permitting the Trustee Program to remove agencies from
the approved list, including an administrative review process
before removal.^15
As with credit counseling providers, the Bankruptcy Act also
established minimum qualification standards for debtor education
providers. For example, the act stated that these entities must
provide personnel with adequate experience and training and use
appropriate learning materials and teaching methodologies. The act
also required that the provider have adequate facilities in
reasonably convenient locations or, alternatively, provide
instruction by telephone or through the Internet. Debtor education
providers also must keep records to permit evaluation of a
course's effectiveness. The act does not require debtor education
providers to be nonprofit entities. The Trustee Program's interim
final rule set forth application procedures and specified the
certification standards for an agency's instructors, established
course procedures and recordkeeping requirements, and identified
the topics that the courses must include.^16
The Trustee Program Developed an Approval Process Designed to Help
Ensure Compliance with Statutory and Program Requirements
The Trustee Program established the Credit Counseling and Debtor
Education Unit in June 2005 to implement the relevant provisions
of the Bankruptcy Act, which went into effect in October 2005.
Because the Trustee Program had no prior experience or expertise
in this area, the unit sought input from a wide variety of
stakeholders, including state and federal agencies, credit
counseling representatives, consumer advocates, and academics. In
June 2005, the unit developed application forms and procedures and
a basic process for approving providers.^17 A wide range of
industry participants told us that the Trustee Program had
generally been successful in setting up an infrastructure,
establishing guidance and an application process, and approving
providers within a very limited time frame.
Credit counseling agencies applying to become approved
providers--or reapplying to maintain their status as
providers--must provide the Trustee Program with a variety of
information used to evaluate the agencies' qualifications. Among
the information that applicants are required to disclose is
o names and other data on current and former officers, directors,
and trustees, including whether any have been convicted of certain
crimes;
o data on the agency, including how long it has been in business,
the number of clients it has served, and relevant licenses,
accreditations, and association memberships;
o revocations of licenses or accreditations, legal actions and
investigations, and disciplinary or enforcement actions;
o audited financial statements for the previous 2 years for
applicants that offer debt management plans;
o nonprofit status, including any correspondence with IRS related
to section 501(c)(3) tax-exempt status;
o information on the nature and content of the credit counseling
services provided, such as the average length of a session;
o written materials, such as handouts and protocols, used in
providing credit counseling services; and
o information on debt management plans serviced by the agency.
To understand and assess the Trustee Program's process for
reviewing applications for credit counseling and debtor education,
we conducted a detailed review of the case files of 32
applications that had been approved and 11 applications that had
been denied.^18 Our case file review found that the Trustee
Program's process for reviewing applicants was generally
systematic and thorough and designed to ensure that the applicants
approved by the program met the qualification standards set forth
in the Bankruptcy Act. In reviewing applications, analysts in the
Counseling and Debtor Education Unit used a checklist to ensure
that each applicant satisfied the statutory and application
requirements and had provided documented evidence to show
sufficient experience, qualifications, and proficiency. In many
cases, applicants had to provide additional information. The
Trustee Program also required some applicants to make
modifications to their programs or processes before approving the
application. For example, in several cases we reviewed, applicants
were required to add additional material to the disclosure
statements provided to clients. In another case, an Internet-based
counseling provider was required to ensure that its counseling
sessions added opportunities for direct interaction between the
debtor and a counselor.
The Trustee Program's review process also includes measures to
evaluate the applicants' character and standing in the credit
counseling industry. For example, Trustee Program officials told
us that they consult publicly available information, such as the
Web site of the Better Business Bureau, and conduct an Internet
search on applicants for information on their character and
corroboration of information submitted. In addition, higher-risk
applicants are evaluated more rigorously. For instance, agencies
that enter a high proportion of clients into debt management plans
may be asked to provide additional information on the number and
nature of these plans. As of October 2006, the Trustee Program had
rejected 96 applications to provide credit counseling or debtor
education services. In most of the cases we reviewed where the
applicant was rejected, it had not provided sufficient
documentation to demonstrate its nonprofit status, the existence
of an independent board of directors, or its ability to perform
adequate counseling. In addition, as of October 2006, 123
applications were withdrawn before being approved or rejected.
Thus, according to the Trustee Program, out of 680 original
applications, 64 percent had been approved by the Trustee Program,
32 percent had been either rejected or withdrawn, and 4 percent
were still in the process of being reviewed.
During the period between July 2005 and January 2007, approval of
credit counseling and debtor education applications took an
average of about 7 weeks from the time they were submitted,
according to information provided by the Trustee Program. In some
cases, the approval of an application can be lengthy--38 weeks in
one instance--in part because applicants often are asked to
provide additional information. Some providers we spoke with said
they believed that the review process could have been more
streamlined--for example, one provider told us it was asked to
provide the same information twice. A Trustee Program official
noted that the credit counseling and debtor education requirement
was still relatively new and the program is continuing its efforts
to streamline and improve the application process.
Trustee Program officials told us they are currently developing
procedures for conducting audits of selected providers that have
been approved for credit counseling or debtor education. These
audits, known as Quality Service Reviews, are expected to include
on-site inspections that will examine, among other things, the
quality of providers' services and compliance with statutory and
program requirements.
Few Complaints Raised about Providers� Competence or Integrity,
although IRS Is Examining the Tax-Exempt Status of Four Providers
As of October 2006, the Trustee Program had approved 153 credit
counseling providers. As required by statute, all of the credit
counseling providers were nonprofit organizations, and about 94
percent of them had tax-exempt status under section 501(c)(3) of
the Internal Revenue Code. While some of the approved agencies
were relatively new organizations, about 90 percent had more than
5 years of experience conducting credit counseling. The three
largest credit counseling providers--Consumer Credit Counseling
Services of Greater Atlanta, GreenPath Debt Solutions, and Money
Management International--represented more than half of all
prefiling credit counseling certificates issued nationwide between
January and October 2006. Many of the approved counseling agencies
were members of the National Foundation for Credit Counseling,
which industry participants told us is regarded as having high
membership standards. In addition, many of these providers were
accredited by the Council on Accreditation.^19
The Trustee Program had also approved 268 debtor education
providers as of October 2006. Many of these providers also
provided credit counseling services and the largest three provided
almost half of all debtor education sessions nationwide. As of
March 2006, about one-third of the debtor education providers had
tax-exempt status under section 501(c)(3) of the Internal Revenue
Code. Several Chapter 13 trustees--individuals appointed by United
States trustees to administer bankruptcy cases--were approved to
provide debtor education, as were some educational institutions,
such as community colleges.
Complaints Have Been Limited
As noted earlier, prior to the implementation of the Bankruptcy
Act, concerns had been raised that debtors required to receive
prefiling credit counseling could be exposed to unfair and
deceptive practices by unscrupulous agencies. However, the great
majority of representatives of consumer advocacy groups, federal
agencies, industry participants, and other stakeholders we spoke
with believed that the credit counseling agencies approved by the
Trustee Program have been reputable. In addition, no federal or
state law enforcement officials we spoke with identified any
federal or state enforcement actions related to consumer
protection issues against any providers subsequent to their
approval. ^20
Between October 2005 and October 2006, the Trustee Program
received 124 complaints about credit counseling and debtor
education providers out of more than 930,000 certificates
issued.^21 Half of these complaints were made by bankruptcy
attorneys, while about one-quarter were made by consumers and
one-quarter by service providers, bankruptcy courts, and others.
Our review of a selection of complaints found that the Trustee
Program took action to assess and follow up on each complaint,
including notifying the relevant provider and asking for a
response to the allegation. Providers typically gave the Trustee
Program a detailed reply and documentation related to the alleged
complaint. For example, one provider offered information based on
a tape recording of the counseling session in question.
Our analysis found that the many of the complaints were related to
administrative issues, such as the timely issuance of a debtor's
certificate or the status of a provider's license. In addition, 20
complaints alleged unfair or inappropriate practices by providers.
These included cases where providers were accused of giving legal
advice, discouraging customers from filing for bankruptcy, or
failing to inform clients of the possibility of a fee waiver. In
many cases, the provider offered evidence that satisfied the
Trustee Program that the complaint was without merit. In a few
cases, the provider acknowledged to the Trustee Program that the
complaint had merit and responded accordingly--for example,
refunding a fee to a client or implementing additional procedures
to ensure staff compliance with relevant policies. In no case did
a complaint result in the Trustee Program removing a provider from
the approved list, according to a program official.
IRS Is Examining Four Providers Approved by the Trustee Program
As noted earlier, IRS has put credit counseling organizations
under additional scrutiny in recent years. As part of its Credit
Counseling Compliance Project, which began in October 2003, the
agency began examinations of 63 credit counseling agencies, which
at the time represented more than half of the industry's revenue.
The examinations focused on whether the agencies were charitable
organizations meeting the requirements for tax exemption under
section 501(c)(3) of the Internal Revenue Code.^22 As of March
2007, IRS had completed examinations of 47 credit counseling
agencies and in all cases the completed examinations resulted in
either revocation, proposed revocation, or other termination of
tax-exempt status. According to a May 15, 2006, IRS press release,
the revocations occurred because these organizations did not
provide the level of public benefit required to qualify for tax
exemption. The agency stated that many of these agencies served
primarily to get clients into debt management plans, offered
little or no counseling or education, and appeared to be motivated
mostly by profit. In many cases, IRS stated, these agencies also
served the private interests of related for-profit businesses,
officers, and directors.
No credit counseling provider approved by the Trustee Program had
had its federal 501(c)(3) tax-exempt status revoked as of March
2007, according to publicly available documents we reviewed.
However, IRS officials told us that four of the credit counseling
agencies still under examination were agencies approved by the
Trustee Program. A Trustee Program official told us that it was
aware of these examinations at the time that it approved these
applicants, but had determined that the four agencies met the
statutory and program requirements despite the IRS scrutiny.^23
The Trustee Program can receive information about a provider's tax
status through several mechanisms. As part of its process of
reviewing applications and reapplications, a Trustee Program
official told us that the program consults publicly available
information from IRS or the applicable state to confirm the
applicant's nonprofit status. As noted earlier, the program's
application forms also require that new applicants--as well as
current providers seeking their annual reapproval--disclose any
audit or investigation by IRS or other federal or state agency. In
addition, the interim final rule requires that providers, once
approved, promptly notify the Trustee Program of any circumstances
that would materially change a response to any section of the
application, which, according to a Trustee Program official, would
include the initiation of an IRS investigation.^24 The interim
final rule also requires that providers notify the program
immediately if IRS cancels or terminates their tax-exempt
status.^25 Applicants and providers are required to submit, upon
request, a written waiver authorizing the Trustee Program to
obtain confidential information about the agency from IRS.^26
Program officials told us they have used such waivers in several
cases to get information on whether a provider is under
examination by IRS and the status of the examination process. The
waiver also gives the program access to any proposed or final
revocation letter from IRS to a provider.
A Trustee Program official told us that when the program learns
that an applicant is under examination by IRS, the program obtains
and reviews correspondence between the applicant and IRS in order
to understand the basis for the examination. For example, the
proposed revocation letter includes the reasons why IRS seeks to
revoke the agency's tax-exempt status. In addition, the Trustee
Program official said that applications of agencies under IRS
examination receive additional scrutiny related to their use of
debt management plans and potential conflicts of interest. As
noted earlier, a Trustee Program official told us the program had
approved the four applicants under IRS examination because after
careful review it was determined that the applicants met statutory
and program requirements.
The official also noted that IRS may determine that a credit
counseling agency is not tax exempt under section 501(c)(3)
because it does not have an exclusively charitable or educational
purpose, but such a finding would not necessarily preclude the
applicant from meeting the statutory or program requirements for
becoming an approved provider. Although the statute requires
credit counseling providers to be nonprofit organizations, it does
not require that they be tax exempt under section 501(c)(3).^27
The interim final rule does allow the Trustee Program to
immediately remove a credit counseling agency from the approved
list if IRS revokes the agency's tax-exempt status.^28 A Trustee
Program official told us that this provision was intended to
protect consumers in cases where IRS's revocation is based on
conduct that raises questions about the integrity of the provider.
A program official told us that should IRS revoke an agency's
tax-exempt status, the program would carefully review the reasons
for the revocation and take whatever actions were appropriate.
Counseling and Education Sessions Meet Statutory and Program
Requirements, but a Wide Range of Observers Question the Value
of the Counseling Requirement
According to the Bankruptcy Act, the prefiling credit counseling
session should provide clients with individualized assessments and
help them develop a plan to respond to their financial situation.
The great majority of counseling is conducted by telephone or via
the Internet rather than in person. We did not find evidence that
counselors were providing biased information and few clients
appear to be entering debt management plans. However, a wide range
of observers questioned the value of the prefiling credit
counseling requirement. It was intended to help consumers make
informed choices about their options, but anecdotal evidence
suggests that by the time most consumers receive the counseling,
their financial problems are dire and they have few viable
alternatives to bankruptcy. The Trustee Program does not track and
monitor the outcomes of counseling sessions because it is not
required to by statute, but such data would be useful in
determining whether the counseling requirement is meeting its
intended goal. Finally, the predischarge debtor education
requirement--a general financial literacy course covering
budgeting, money management, credit, and consumer protection--is
believed by most observers we spoke with to be beneficial.
Credit Counseling Sessions Are Designed to Provide Debtors
with Individualized Assessments
The Bankruptcy Act describes the required prefiling credit
counseling as "an individual or group briefing (including a
briefing conducted by telephone or on the Internet) that
outline[s] the opportunities for available credit counseling and
assist[s] such individual in performing a related budget
analysis."^29 The act requires that this session include an
analysis of a client's current financial condition and the factors
that caused this condition and help develop a plan to respond to
the client's problems that would not involve incurring additional
debt. The Trustee Program's interim final rule indicated that
counseling sessions should average 60 to 90 minutes in length and
prohibited credit counselors from providing debtors with legal
advice, unless otherwise authorized by law.^30 The Trustee Program
has not published additional formal guidance or instruction about
the nature or content of the counseling session. Trustee Program
officials told us that it was widely understood that the content
of the prefiling counseling session would closely resemble the
traditional sessions that reputable credit counseling agencies
have provided for many years.
Our review of the Trustee Program's case files and counseling
materials of 15 credit counseling providers--representing more
than two-thirds of certificates issued--showed that the content of
the credit counseling sessions, as described in the written
materials, was in accordance with the requirements of the
Bankruptcy Act. In general, the different providers had similar
curricula and materials, although some providers covered certain
topics more thoroughly than others. For example, some providers
included more detailed discussions of topics such as modifying
spending habits, avoiding identity theft, or negotiating with
creditors. Credit counseling sessions generally began with
providers collecting data on the client's finances, including
sources and amount of income, debt, and expenses. In some cases,
providers received some of this information from the client in
advance via the Internet or from the client's credit report.
Individual counselors then typically analyzed the data with a
software program and provided the client with a personalized
budget. They discussed the client's financial goals and potential
opportunities for reducing spending and paying off debt.
Counselors then described the client's options--for example,
developing a budget, entering into a debt management plan, or
filing a Chapter 7 or Chapter 13 bankruptcy. Although counselors
are prohibited from giving legal advice or recommending whether or
not clients should file for bankruptcy, some providers describe
the advantages and disadvantages of each alternative. When the
session is over, the counselor issues a certificate verifying that
the client has completed the prefiling credit counseling
requirement.
Most Credit Counseling Is Conducted by Telephone or Internet
Although most providers offer clients the option of conducting
credit counseling sessions in person, available data indicate the
great majority of debtors fulfill their prefiling requirements by
telephone or via the Internet. Trustee Program data collected on
certificates issued between July 11 and October 17, 2006,
indicated that 45 percent of all prefiling counseling sessions
were conducted by telephone, 43 percent were conducted via the
Internet, and 13 percent were conducted in person.^31 Similarly, a
survey by the National Foundation for Credit Counseling of its
member agencies that conduct prefiling counseling found that
between October 17, 2005, and August 31, 2006, 61 percent of their
sessions were conducted by telephone, 24 percent via the Internet,
and 15 percent in person.
Academic researchers, counseling providers, and other experts we
spoke with said that although in-person counseling may have
advantages, telephone counseling can be an effective method of
delivery. While some providers noted that counseling conducted
face-to-face can be beneficial when addressing more complex
financial situations, other providers and industry participants
noted that telephone counseling may allow clients more convenience
and flexibility and may be easier for people with mobility
problems, such as the elderly. A recent study by Georgetown
University's Credit Research Center found no significant
difference in the outcomes of credit counseling sessions conducted
by telephone or in person.^32 Specifically, the study found that
clients receiving in-person and telephone counseling had similar
risks of bankruptcy or credit problems 2 years later. Our review
of materials used to facilitate credit counseling sessions
indicated that they generally had the same content and structure
regardless of whether they were delivered in person, by phone, or
via the Internet.
To receive prefiling credit counseling via the Internet, a client
generally logs on to the provider's Web site and inputs the same
data on his or her finances that would be provided during a
telephone or in-person session. On the basis of these data, the
client is typically provided information and a financial analysis,
including a description of the available alternatives. Trustee
Program officials told us all approved Internet-based credit
counseling sessions were required to include a separate component
in which the client communicated individually with a counselor.
Providers told us that after completing the Internet portion of
the counseling session, the client could speak with a counselor by
telephone or, in some cases, via Web chat. During these one-on-one
communications, which one provider told us typically last 10 to 20
minutes, counselors reviewed the budget analysis with the client
and answered any questions. The Trustee Program also requires
providers to have procedures to effectively verify their clients'
identity. We did not identify any significant research on the
effectiveness of credit counseling facilitated via the Internet.
The Trustee Program told us that it has contracted with the RAND
Corporation to review the comparative effectiveness of credit
counseling delivered via telephone, Internet, and in person. A
report from RAND is expected to be issued by July 2007.
Available Evidence Indicates That Prefiling Credit Counseling
Results in Few Debt Management Plans
The Bankruptcy Act includes provisions designed to help ensure
that credit counseling sessions provide objective information and
present the client with alternatives in a neutral manner. For
example, the act requires that counseling providers be nonprofit
entities with independent boards of directors and prohibits
counselors from receiving commissions or bonuses based on the
outcomes of the counseling sessions. Despite these provisions,
some consumer advocacy groups, policymakers, and others expressed
concerns that credit counseling provided under the Bankruptcy Act
might sometimes be biased and not in the clients' best interests.
Specifically, concerns existed that providers might
inappropriately discourage clients from filing for bankruptcy and
instead encourage them to enter into debt management plans that
benefited the agency but not the debtor.
However, available evidence indicates that only a very small
number of clients receiving prefiling credit counseling have
entered into any debt management plan. Counseling providers and
representatives of bankruptcy attorneys we spoke with generally
estimated that fewer than 2 percent of prefiling credit counseling
clients entered debt management plans. Further, a survey by the
National Foundation for Credit Counseling of its member agencies
indicated that about 3 percent of clients who signed up for
prefiling counseling from October 2005 through August 2006
enrolled in a debt management plan. In general, representatives of
consumer groups, panel trustees, and others told us that they had
not observed cases in which clients receiving prefiling credit
counseling had been inappropriately encouraged to enter debt
management plans or avoid filing for bankruptcy. As of October
2006, the Trustee Program had received five formal complaints (out
of more than 650,000 credit counseling certificates issued)
alleging that providers made harmful or inappropriate
recommendations. Our review of the documentation associated with
these five complaints indicated that in each case the provider
gave the Trustee Program a comprehensive response. In each of
these five cases, the program was satisfied that either the
complaint lacked merit or the provider had taken appropriate steps
to remediate the problem.
Many Question the Value of the Credit Counseling Requirement, but
Data on Outcomes Are Limited
The Conference Report accompanying the Bankruptcy Act indicated
that the purpose of the credit counseling provisions was to ensure
that consumers could "make an informed choice about bankruptcy,
its alternatives, and consequences." ^33 The report further noted
that the counseling was intended to give consumers in financial
distress "an opportunity to learn about the consequences of
bankruptcy--such as the potentially devastating effect it can have
on their credit rating" before they decided to file for bankruptcy
relief.^34
However, it is unclear whether the credit counseling requirement
is achieving its intended purpose. While quality credit counseling
can, in general, be beneficial, a wide range of observers we spoke
with--including representatives of federal agencies, bankruptcy
attorneys, and panel trustees; consumer advocates; and several
counseling providers--told us that the timing of the counseling
conducted to fulfill the requirement of the Bankruptcy Act could
mitigate its value. The federal Financial Literacy and Education
Commission noted in its national strategy that the use of
reputable credit counseling could have a significant positive
impact, making borrowers more creditworthy and decreasing their
debt. But the strategy also recommended that consumers seek credit
counseling services early, when financial problems start, to avoid
potential bankruptcy.^35 In practice, however, by the time
individuals obtain prefiling credit counseling, they usually have
already consulted with a bankruptcy attorney and have serious
financial problems, such as imminent foreclosure of their homes.
As such, anecdotal evidence indicates that the great majority of
clients receiving prefiling counseling have few viable
alternatives to bankruptcy.^36 The Bankruptcy Act's credit
counseling requirement therefore may not be serving its purpose of
helping consumers make informed choices about whether or not to
file for bankruptcy. Providers and others told us that many
clients perceived the counseling session as an administrative
obstacle rather than a useful exercise.
Questions about the value of the prefiling requirement stem from a
widespread belief among observers that nearly all of the consumers
that receive the credit counseling subsequently file for
bankruptcy. Yet the evidence for this is largely anecdotal, as
comprehensive data do not currently exist on the outcomes of those
consumers who receive prefiling credit counseling. Neither the
Trustee Program, credit counseling providers, or any other party
currently track how many consumers who receive credit counseling
subsequently file for bankruptcy within the 180 days during which
the certificates may be used. Similarly, little is known about the
alternatives chosen by those consumers who do not file for
bankruptcy or how the credit counseling affects their
decisions.^37
During roughly the first half of 2006, some 381,005 counseling
certificates were issued and 263,408 bankruptcy petitions
filed.^38 However, this information on its own does not provide a
reliable estimate of how many consumers who received counseling
subsequently filed for bankruptcy, for several reasons. First, in
cases that involve a husband and wife filing a joint bankruptcy
petition, each must obtain counseling and be issued a certificate.
Second, a time lag may exist between the time the certificate is
issued and the time of the filing, because the certificate is good
for 180 days. For this reason, reported bankruptcy filings during
a given time frame will not reflect all the bankruptcies that will
be filed using the certificates issued in that time frame. Third,
certificates are sometimes cancelled and reissued for
administrative reasons (such as the misspelling of the client's
name), so that one person is issued two certificates. Finally,
occasionally a client may receive prefiling credit counseling but
not be issued a certificate--for example, if the client decides
not to file for bankruptcy.
When a provider completes a prefiling credit counseling session,
it uses a Web-based system operated by the Trustee Program to
issue the client a certificate, which includes a unique
certificate number. While the Trustee Program maintains a list of
certificate numbers, for privacy purposes it does not receive any
information, including names, about the clients who were issued
certificates. A bankruptcy petitioner must provide to the court a
certificate to document having satisfied the prefiling counseling
requirement. However, the courts do not track or report the unique
numbers assigned to these certificates. As a result, it is not
possible to link individuals who have received prefiling credit
counseling with individuals who have filed for bankruptcy.
A Trustee Program official told us that the program had not taken
steps to track and monitor the outcomes of credit counseling
sessions because this effort was not part of its statutory
responsibilities. The Bankruptcy Act, he noted, requires the
Trustee Program to test and evaluate the effectiveness of a pilot
debtor education curriculum, but contains no analogous provisions
for monitoring or evaluating credit counseling.^39 As we have
reported in the past, meaningful data on program outcomes and
costs are essential for appropriate oversight and decision
making.^40 Without reliable data on the outcomes of the prefiling
credit counseling sessions, policymakers and program managers lack
information that would allow them to determine how well the
statutory requirement is truly serving to inform consumers about
their options.
Debtor Education Sessions Are Designed to Offer Financial
Management Skills
The Bankruptcy Act describes the debtor education requirement as
an "instructional course concerning personal financial management"
that could be offered in person, by telephone, or via the
Internet.^41 The Trustee Program's interim final rule specified
that the course should average 2 hours in length and include
written information and instruction on four major topics:
o budget development, which includes, calculating income,
identifying and classifying monthly expenses, and setting
short-term and long-term goals;
o money management, which includes keeping adequate financial
records, developing decision-making skills to distinguish between
wants and needs, comparison shopping, maintaining appropriate
levels of insurance, and saving for emergencies;
o wise use of credit, which includes understanding the types,
sources, and costs of credit and loans; identifying debt warning
signs; using credit appropriately and identifying alternatives to
credit; and checking a credit rating;
o consumer information, including public and nonprofit resources
for consumer assistance and applicable consumer protection laws
and regulations.^42
In reviewing the debtor education curricula, teaching guides, and
other materials of 17 debtor education providers, we found that
the content included the topics and elements that the Trustee
Program required. In general, we found the curricula of different
providers to be fairly similar, although some providers included
additional details or emphasis on certain topics. According to a
Trustee Program official, to cover the required topics, most of
the debtor education providers used 1 of about 15 standard
curricula--for example, the National Foundation for Credit
Counseling's "Live a Richer Life" or the Federal Deposit Insurance
Corporation's "Money Smart."
The Bankruptcy Act required that the Trustee Program, after
consulting with a wide range of experts in the field, also develop
its own curriculum and training materials for debtor education.
The act required the program to test the effectiveness of this
curriculum and materials for 18 months in six judicial
districts.^43 In September 2005, the Trustee Program contracted
with the Education Development Center, a nonprofit research firm,
to develop the pilot curriculum and with Abt Associates, a private
consulting firm, to evaluate it. The curriculum, entitled
"Financial Education: Principles and Practices," was presented by
academic institutions in the six judicial districts selected for
the pilot and was still being evaluated as of March 2007.^44
Trustee Program data collected on certificates issued between July
11 and October 17, 2006, indicated that 50 percent of predischarge
education sessions was conducted by Internet, 29 percent was
conducted via telephone, and 21 percent was conducted in person.
In-person debtor education courses are typically conducted in a
group classroom setting, while telephone sessions are conducted in
one-on-one or group settings. For Internet sessions, the client
generally reads the educational material and takes an on-line
quiz, and then may have a follow-up discussion with an instructor.
The Trustee Program does not require that debtor education
conducted via the Internet include individual communication with a
counselor, but a counselor must be made available to answer any
questions clients may have.
Most representatives of consumer groups, panel trustees,
bankruptcy attorneys, and others we spoke with believed that the
predischarge debtor education course was likely to help improve
consumers' financial literacy. They noted, for example, that
consumers completing bankruptcy should receive guidance on
budgeting, avoiding future debt, and rebuilding credit. The
National Association of Chapter 13 Trustees established a similar
debtor education course several years before the Bankruptcy Act
took effect. According to representatives of Chapter 13 trustees,
these courses were particularly helpful for debtors under Chapter
13 bankruptcy protection, who operate under a repayment plan for
up to 5 years, and debtors who took the course were more likely to
successfully complete their repayment plans.^45
Provider Fees Are Generally Considered Reasonable, Although Fee
Waiver Policies Vary
The Bankruptcy Act requires that providers charge reasonable fees
and provide their services without regard to a client's ability to
pay. Neither the statute nor the Trustee Program's interim final
rule provide specific criteria for what constitutes a "reasonable
fee" or "client's ability to pay." Available evidence indicates
that credit counseling and debtor education sessions typically
cost about $50 or less, an amount that representatives of consumer
groups, legal organizations, and others we spoke with generally
believed to be reasonable. Providers varied in their policies and
practices for waiving fees. The Trustee Program has not issued
rules or specific guidance on what constitutes a debtor's ability
to pay because it wanted to give providers the flexibility to
respond to market conditions. However, formalized guidance could
be beneficial because it could, among other things, set a minimum
benchmark for reducing or waiving fees.
Providers Must Charge Reasonable Fees and Provide Services
Regardless of Clients� Ability to Pay
The Bankruptcy Act requires that credit counseling and debtor
education providers charge reasonable fees for their services and
provide these services without regard to the client's ability to
pay the fee.^46 However, the statute did not specify what fees are
considered "reasonable" nor what constitutes a client's "ability
to pay." Before the Bankruptcy Act came into effect, the Trustee
Program noted on its Web site that based on information provided
by the industry, it believed that credit counseling would
generally be available for a fee ranging from free to $50. The
site also noted that a number of variables may affect an agency's
fee structure, including geography, types of services provided,
administrative costs, and the presence of alternate funding
sources. The Trustee Program said that in determining whether fees
were reasonable, it would consider these factors as well as the
fees customarily charged in the industry for similar services. The
site did not provide information about the expected fees for
debtor education.
In its interim final rule, adopted in July 2006, the Trustee
Program did not provide specific guidance on what dollar amount
would constitute a reasonable fee nor the criteria providers
should use in determining a client's ability to pay. A Trustee
Program official told us that in addition to the program's
publicly available guidance, it has provided informal feedback to
providers who have inquired about the appropriateness of their fee
structures. The Trustee Program requires that providers disclose
their fee schedules in their applications, and as of July 2006,
has also required providers to disclose their policies for
reducing or waiving fees based on the client's ability to pay.^47
The official told us that the program reviews providers' waiver
policies during the application process to ensure that the
policies are clear and objective, and in some cases have rejected
applicants for inadequate fee waiver policies. The interim final
rule specified that providers must advise clients of their fee
schedules before services are rendered and inform them that
services are available for free or at a reduced rate based on
their ability to pay. It also prohibited providers from charging a
separate fee for issuing the counseling and education
certificates.
While Providers� Fees Are Considered Reasonable, Fee Waiver
Policies Vary
The Trustee Program requires providers to report in their
applications and reapplications the fees that they charge,
although the program does not track these data centrally. Trustee
Program staff, providers, and trade association representatives
told us that most providers charge around $50 each for their
credit counseling and debtor education sessions. This estimate was
corroborated in survey data collected by the National Foundation
for Credit Counseling from 107 providers, which reported charging
an average fee of $47 for prefiling credit counseling and $43 for
debtor education.^48 In addition, each of the three largest
providers, which as of October 2006 had issued about half of all
certificates, told us that they charged exactly $50 for an
individual credit counseling or debtor education session. Among
the smaller credit counseling providers we spoke with, two told us
that they charged $50, and the others charged $49, $35, and $0.
Among debtor education providers we spoke with, fees ranged
between $0 and $50 per individual session. In a few cases, we
identified smaller counseling and education providers whose fees
were higher, such as $75 per session. Representatives of consumer
groups and legal organizations, as well as academics and others we
spoke with, generally said they believed that the fees charged by
credit counseling and debtor education providers had been
reasonable. Some providers said that the fees had generally been
adequate to cover their costs, but others said that prefiling
counseling was being subsidized by their other lines of business.
Providers noted that the requirements were still relatively new
and that as the true cost of providing these services in the long
term became clearer, they might consider adjusting their fees.
Providers have varying policies for determining a client's ability
to pay the fee. In September 2005, the National Foundation for
Credit Counseling, after consulting with the Trustee Program, told
its members that the program said it would be appropriate to waive
counseling fees for clients with incomes less than 150 percent of
the poverty line--the same eligibility threshold authorized by
federal law for waiving the fees charged by the court for filing a
bankruptcy petition.^49 Some providers we interviewed used as
their threshold a different percentage of the poverty line or
other criteria, such as whether the client received legal aid or
disability benefits. The three largest providers all use differing
criteria--one told us it waived fees for clients at or below 150
percent of the poverty line, a second for clients at or below 120
percent of the poverty line, and a third based on whether the
client received free legal aid or had disability income. Providers
we spoke with generally said that they allowed counselors to use
their discretion to waive fees in additional circumstances as
well. According to Trustee Program data, the three largest
providers waived their fees 4 percent, 15 percent, and 26 percent
of the time for credit counseling sessions, and 6 percent, 21
percent, and 34 percent of the time for debtor education courses.
A Trustee Program official told us that three factors were
responsible for the differences in the proportions of clients
whose fees were reported waived. First, providers had different
policies for determining ability to pay. Second, some providers
chose to waive fees for some clients who did not qualify under the
provider's formal policy. Third, providers were inconsistent in
how they reported fee waiver data to the Trustee Program--for
example, some providers counted as waivers cases in which clients
were charged the fee but failed to pay.
Some policymakers and consumer groups have expressed concerns that
providers might not always clearly inform clients that fees could
be waived for those unable to pay. Stakeholders involved in the
process told us that there had been limited anecdotal evidence to
support this concern. In addition, out of more than 930,000 credit
counseling or debtor education certificates issued as of October
2006, the Trustee Program had received only seven formal
complaints about providers that had not waived fees or told
clients about this option. Trustee Program officials noted that
nearly all complaints related to fees and fee waivers were made
shortly after the Bankruptcy Act went into effect and the
requirements were new.
Trustee Program Has Not Issued Formal Guidance on Determining a
Client�s Ability to Pay
As noted earlier, neither the statute nor the Trustee Program's
rulemaking provide criteria for what constitutes a client's
ability to pay the fee for a counseling or education session. Some
providers told us that the lack of guidance left them unsure about
the criteria they should use. Eight of the 22 comments to the
interim final rule submitted by providers, industry associations,
and consumer groups requested that the Trustee Program provide
guidance or clarification on what constitutes a client's ability
to pay. In some cases, the comments suggested that the program
provide objective measures or uniform criteria. Several providers
we spoke with, as well as trade associations, consumer groups, and
creditor organizations, also told us that additional guidance on
determining ability to pay would be beneficial.
Trustee Program officials told us that they are considering
formalizing criteria, in a rulemaking, that providers should use
to determine clients' ability to pay but that they have not made a
final decision on the issue. Program officials told us that they
were reluctant to formalize such criteria because they did not
want to be too prescriptive and wanted to give providers
flexibility to respond to market conditions--for example, to
adjust fee waiver policies based on local economic conditions and
costs of doing business. However, clearer guidance on determining
a client's ability to pay could have several benefits. First, it
could reduce uncertainty among providers as to what criteria are
appropriate. Second, it could improve transparency by clarifying
the minimum standards for waiving or reducing fees. Finally, it
could help ensure that services are offered to clients regardless
of ability to pay by providing guidelines for a minimum benchmark
on when fees should be reduced or waived.
Supply of Providers Appears Sufficient and Actions Under Way
Address Challenges Some Consumers May Face Fulfilling the
Requirements
Evidence showed that as of October 2006, enough prefiling credit
counseling and predischarge debtor education providers--153 and
268, respectively--had been approved to allow consumers to receive
these services on a timely basis. Although in-person counseling or
education is not easily accessible in some parts of the country,
these services are available via telephone or Internet, and most
debtors favored these options. Many providers offer services in
several languages or provide translation services. Anecdotal
evidence suggests that consumers who try to file for bankruptcy
without an attorney sometimes are not aware of the credit
counseling requirement. A survey of federal bankruptcy judges
conducted by the Federal Judicial Center indicated that debtors
who file for bankruptcy without fulfilling the credit counseling
requirement can face a variety of consequences.
Enough Counseling and Education Services Exist to Meet Demand
Before the Bankruptcy Act went into effect, some members of
Congress, consumer advocates, and others worried that not enough
counseling services would be available within the required time
frame for people filing for bankruptcy. Our review of the limited
data available and anecdotal evidence indicated that as of October
2006 the supply of credit counseling and debtor education services
had been adequate to meet the demand for these services. A wide
range of participants in the bankruptcy process--including
bankruptcy attorneys, panel trustees, a bankruptcy court
representative, and service providers--told us that getting access
to these services in a timely manner had generally not been a
barrier to filing or receiving discharge of debts.
When the Bankruptcy Act went into effect in October 2005, the
Trustee Program had approved 71 credit counseling and 76 debtor
education providers. As of October 2006, this number had risen to
153 credit counseling and 268 debtor education providers. The
three largest organizations provide about 56 percent of the credit
counseling sessions and about 46 percent of the debtor education
sessions. While the majority of providers are local organizations
offering services in particular communities, about a dozen offer
services nationwide, either through a network of field offices or
through telephone or Internet services. Because the great majority
of debtors fulfill the credit counseling and debtor education
requirements through sessions provided by telephone or via the
Internet, having providers nearby is not always necessary.
A wide range of participants we spoke with told us that consumers
who call to schedule a credit counseling or debtor education
session can usually be accommodated within 24 hours, and sometimes
much sooner. Providers sometimes refer potential clients to
another provider if they cannot see a client in a timely manner.
The providers we spoke with, which represented the great majority
of certificates issued, told us that they currently had adequate
capacity to meet demand for their bankruptcy-related services. At
the same time, the volume of bankruptcy filings has been
relatively low since the Bankruptcy Act became effective and the
capacity of providers could potentially become an issue should
bankruptcy filings substantially increase in the future. However,
several large providers told us they would be able to expand their
capacity if needed.
In-Person Counseling Is Not Always Available, but Few Seek It
Nearly all approved credit counseling and debtor education
providers offer their clients the option of in-person sessions. As
of July 2006, consumers could receive prefiling credit counseling
in person at more than 700 locations and debtor education in
person at more than 1,000 locations. Comprehensive data do not
exist on the precise proportion of consumers living close enough
to agencies providing in-person counseling or education to
comfortably travel to such a site. However, an analysis of
existing data suggests that in-person counseling and education
sessions are accessible to most of those who need
them--particularly in metropolitan areas--but are not easily
accessible in certain portions of the country. For example,
judicial districts had, on average, 8 locations where consumers
could fulfill the credit counseling requirement and 11 where they
could meet the debtor education requirement via an in-person
session. But some large judicial districts, such as those in
Alaska, North Dakota, and Wyoming, had 5 or fewer such locations.
No in-person locations existed for credit counseling in the
district encompassing Southern Illinois, nor was in-person debtor
education available in the District of Columbia.
Some providers we spoke with said that they had not expected that
there would be so little demand for in-person prefiling credit
counseling and predischarge debtor education services, pointing
out that, by contrast, more than half of their traditional credit
counseling sessions were conducted in person. Because of the low
demand for in-person prefiling counseling, one large provider told
us that it had reallocated some of its resources--for example, by
closing some local offices and expanding call centers that provide
telephone counseling.
Among participants in the process with whom we spoke, the
consensus was that debtors sought to conduct the counseling and
education sessions by telephone or Internet because these were the
quickest and most convenient methods for satisfying the statutory
requirements. As noted earlier, by the time most debtors receive
the counseling, they have already consulted an attorney and
decided to seek bankruptcy protection and see the counseling and
education sessions largely as administrative obstacles to be
overcome as quickly as possible.
Although relatively few debtors appear to seek in-person services,
some consumer advocates and others have said that debtors in all
parts of the country should at least have the option of obtaining
services in person. These parties have noted that while some
debtors may find telephone counseling more convenient, others may
find in-person services a more comfortable and effective option.
The Trustee Program's Web site includes information about
providers that offer in-person sessions and the locations for
these sessions.
Steps Under Way to Address Challenges of Certain Populations in
Accessing Services
Some potential bankruptcy filers, such as those who do not speak
English, have limited literacy skills, or are not represented by
an attorney, may face certain challenges in accessing prefiling
credit counseling and predischarge debtor education. The Trustee
Program and the courts have certain actions planned or under way
to help address these challenges.
Non-English Speakers
As of October 2006, many credit counseling and debtor education
providers offered their services in Spanish, and several offered
services in other languages. For example, two large nationwide
providers can conduct sessions in at least 15 languages and, using
a translation services contractor, can provide sessions in about
150 languages. Because these providers offer telephone counseling
and have been approved to provide counseling and education in
almost all judicial districts, their services are accessible to
debtors nationwide. Some smaller local providers also offer
in-person and telephone services in languages other than
English--for example, a provider serving a region with large
Chinese and Korean populations told us that it offered services in
those languages. Providers that cannot offer services in a
client's primary language may refer the client to a provider that
can. In some cases, counseling or education sessions are
translated for the debtor by a friend or family member, although
representatives who advocate for language access issues told us
that this method is not fully effective. In addition, some
providers offer written materials in Spanish but not in other
foreign languages. As a result, debtors whose primary language is
other than English or Spanish will receive information orally, but
may not benefit from supplementary written materials.
Consumer and language access advocates, as well as representatives
of bankruptcy attorneys, told us they were concerned about the
ability of some non-English speakers to receive counseling and
education services in their native languages in a timely and
effective manner. One advocate noted that translation of these
sessions may not always be effective given the technical nature of
some of the financial terms used and the sensitive nature of the
topics under discussion. These concerns were highlighted in a
March 2006 decision in the Southern District of Florida, where a
bankruptcy judge waived the prefiling credit counseling
requirement for a man who said he was unable to find a provider
that could offer him counseling in Creole.^50 However, although
comprehensive data do not exist, most providers told us that
demand for sessions in languages other than English and Spanish
has been low. For example, one large nationwide provider estimated
that less than one-half of 1 percent of its clients require the
use of its telephone-based translation services contractor. This
provider also told us it had not had any requests for in-person
counseling in languages other than English or Spanish.
When the Bankruptcy Act went into effect in October 2005, the
Trustee Program's Web site did not include any information on
which foreign languages individual providers offered. In April
2006, the Trustee Program modified its Web site to include foreign
languages offered by providers. The Trustee Program surveyed all
providers in November 2006 to gather additional information on
their available languages and translation services. As of January
2007, the Web site allowed users to conduct a search to identify
providers offering services in any one of 29 languages.^51 A
program official told us that he expected that eventually the Web
site will include a function that will allow consumers to search,
by provider and location, for all languages and translation
services offered.
Individuals With Special Needs or Circumstances
Apart from non-English speakers, certain other populations may
have experienced challenges in accessing counseling and education
sessions. For example, it may be difficult for individuals with
limited literacy skills to understand counseling and education
sessions, which often rely heavily on written materials. In such
cases, some providers told us that during the session they read
aloud most of the written materials. Some consumer advocates and
representatives of bankruptcy attorneys have also expressed
concerns about the ability of disabled, elderly, or incarcerated
debtors to easily access credit counseling and debtor education in
an effective and timely manner. We could not find any data on the
nature of and extent to which such difficulties exist. Most
participants in the bankruptcy credit counseling process that we
spoke with said that while there may be individual examples in
which debtors with special needs faced challenges accessing needed
services, it did not appear that this was an issue for a large
number of debtors.
Debtors Without Attorneys Also Can Face Challenges
Debtors filing for bankruptcy protection may use an attorney or
may file without one (pro se). The proportion of debtors filing
pro se varies across different judicial districts. For example,
among seven bankruptcy courts that the Administrative Office of
the U.S. Courts surveyed at our request, as few as 4.5 percent and
as many as 24.9 percent of debtors filed pro se.^52 At the initial
meeting with a client, a bankruptcy attorney will typically tell
the client about the credit counseling requirement. The attorney
will often give the client contact information for approved
counseling agencies and may provide a room with a telephone so
that clients can fulfill the counseling requirement on the spot.
Debtors who file without the aid of an attorney can learn of the
prefiling credit counseling requirement through other sources,
such as instructional information located on the form of the
voluntary petition that must be filed by the debtor, in other
written materials provided by the bankruptcy court, or on the Web
sites of the bankruptcy courts or the Trustee Program. Each of the
94 federal judicial districts has its own methods of disseminating
explanatory information. When we telephoned bankruptcy courts in
seven judicial districts to inquire about the process for filing
for bankruptcy, staff typically directed us to the court's Web
site. A review of nine courts' Web sites found that all but one
highlighted the prefiling counseling requirement in a relatively
prominent fashion, such as noting it on their home page. In one
case, the requirement was not prominently noted, but instead was
included among a long list of public notices.
The bankruptcy courts in all districts use a uniform set of
Official Bankruptcy Forms that individuals must complete to file
and take action in bankruptcy cases. In June 2006, at the
suggestion of the Trustee Program, the Advisory Committee on
Bankruptcy Rules of the Judicial Conference of the United States
modified the main form for filing a bankruptcy petition to make
the prefiling counseling requirement more clear and conspicuous.
The form now requires that petitioners attach an additional
exhibit--Individual Debtor's Statement of Compliance With Credit
Counseling Requirement--to attest to compliance with the
requirement or claim an exigent circumstance.
Debtors who file for bankruptcy without fulfilling the credit
counseling requirement can face a variety of consequences. A
survey conducted by the Federal Judicial Center asked U.S.
bankruptcy judges what procedures they follow when a debtor has
not produced a prefiling credit counseling certificate.^53 When
asked in the survey to select one or more, 44 percent of judges
said they had given such filers a specified period to produce the
certificate, 34 percent had issued an Order to Show Cause or
otherwise set a hearing on the deficiency, 20 percent had taken no
action, and 13 percent had dismissed the case. The survey also
showed that 35 percent of the judges said they treated imminent
foreclosure or eviction, by itself, as an exigent circumstance,
while about 55 percent treated this as an exigent circumstance
only if the debtors could satisfactorily explain why they had not
yet received credit counseling. Another 10 percent said that
imminent foreclosure or eviction was never an exigent
circumstance.
Before the Bankruptcy Act went into effect, some policymakers,
consumer advocates, and others expressed concern that the credit
counseling requirement could create hardship for some debtors by
delaying their ability to file a bankruptcy petition and receive
the automatic stay that prohibits creditors from continuing to
seek payment. This stay can be very important to some debtors--for
example, those facing foreclosure on their homes. However, we did
not identify data on the extent to which failure to receive credit
counseling has created such hardships.
Conclusions
Within a limited time frame, the Trustee Program established
policies and procedures for selecting credit counseling and debtor
education providers, and thus far relatively few concerns have
been raised about the competence of approved providers. We found
that the program's process for reviewing credit counseling
applicants was generally comprehensive and included numerous steps
designed to assess applicants' proficiency and reputability. The
Trustee Program said it is carefully monitoring the circumstances
of the IRS examinations of four approved providers and will take
appropriate actions based on the outcomes of these
examinations--which we agree is essential given that IRS's past
examinations have often revealed abusive practices.
We also found that the value of the prefiling credit counseling
requirement is not clear. The requirement was intended to provide
consumers with information about bankruptcy and its alternatives
so they can make informed decisions about their options. In
practice, however, anecdotal evidence strongly suggests that most
consumers have no realistic alternative to bankruptcy by the time
they receive the counseling. As such, a wide range of stakeholders
view the prefiling counseling requirement as an administrative
obstacle rather than a useful exercise. It is therefore uncertain
whether the requirement is achieving its key goal of helping
consumers determine whether or not to file for bankruptcy. Better
data on the outcomes of prefiling credit counseling would help
program managers and policymakers determine its value. In
particular, it would be useful to confirm whether, as many
believe, nearly all consumers who receive prefiling counseling
subsequently file for bankruptcy. The Trustee Program does not
currently collect this information because doing so is not part of
its explicit statutory responsibilities. In addition, there is
currently no mechanism in place to match individual counseling
certificates with bankruptcy filings. However, appropriate data on
outcomes are essential to understanding program benefits and costs
and to effective oversight and decision making. Data on how often
counseling sessions result in bankruptcy filings or other outcomes
would help determine how well the prefiling credit counseling
requirement is serving its intended purpose.
There is less debate about the predischarge debtor education
requirement, which provides broad-based financial education to
debtors near the end of the bankruptcy process. This requirement
is consistent with the increased attention being paid by Congress
and executive branch agencies in recent years to improving
Americans' financial literacy. As we have noted in earlier
reports, we believe that ensuring that Americans have the
knowledge and skills to manage their money wisely is a key element
in improving the economic health of our nation in current and
future generations.^54 Financial education efforts that seek to
achieve goals such as reducing Americans' debt are key to helping
improve our citizens' economic security and our country's economic
growth.
The fees charged for credit counseling and debtor education
services generally appear to be reasonable. However, the extent to
which fees are waived varies considerably among providers. The
Trustee Program has not issued rules or formal guidance for what
constitutes a debtor's "ability to pay" because it wants to give
providers flexibility to respond to market conditions. While we
understand the program's reluctance to be too prescriptive, we
also believe that clearer guidance on criteria for reducing or
waiving fees would have several benefits, including reducing
uncertainty among providers about appropriate criteria, providing
greater transparency on waiver policies, and ensuring compliance
with minimum standards for waiving fees among all providers. At
the same time, this guidance should give providers some
flexibility, so as not to discourage those who may wish to waive
fees more liberally than required.
The supply of credit counseling and debtor education providers
appears to be sufficient to allow consumers to access these
services in a timely manner. While in-person services are not
always available in some locations, this concern is somewhat
mitigated by the fact that the great majority of clients appear to
prefer telephone or Internet counseling. Accessing services in
languages other than English or Spanish has been a challenge for
some consumers, however. The Trustee Program's recent efforts to
better communicate providers' language and translation services
represent positive actions in facilitating access by speakers of
foreign languages. Further, the courts' recent steps to better
ensure that filers are aware of the prefiling counseling
requirement are beneficial given the potential consequences of
filing for bankruptcy without the required counseling certificate.
Recommendations
We recommend that the Attorney General direct the Director of the
Executive Office for U.S. Trustees to do the following:
o To help assess the merit of the Bankruptcy Act's prefiling
counseling requirement, the Trustee Program should develop a
mechanism that would allow the program or other parties to track
the outcomes of prefiling credit counseling, including the number
of individuals issued counseling certificates who then file for
bankruptcy. This may involve working in conjunction with the
Administrative Office of the U.S. Courts to ensure that the unique
certificate numbers issued by the Trustee Program can be linked to
bankruptcy petitions filed with the courts.
o To clarify the Bankruptcy Act's requirement that prefiling
credit counseling and predischarge debtor education be provided
regardless of a client's ability to pay, the Trustee Program
should issue formal guidance on what constitutes "ability to pay."
In developing this guidance, the program should examine the
reasons behind the significant variation among providers in
waiving fees. In addition, while this guidance should set a
minimum benchmark for when fees should be reduced or waived, it
should be designed so as not to limit or discourage providers who
may wish to waive fees for more clients than qualify under the
minimum benchmark.
^5 Neither the prefiling counseling requirement nor the predischarge
debtor education course requirement are applicable with respect to a
debtor who (i) resides in a district that a U.S. Trustee has determined
does not have adequate capacity to service individuals requesting
counseling or (ii) is incapacitated, disabled, or on active military duty
in a military combat zone. 11 U.S.C. SS 109(h)(2), 109(h)(4), 727(a)(11)
and 1328(g)(2).
^6 A debtor may be granted a temporary waiver to complete the counseling
requirement after the filing of the petition if the debtor satisfies the
court that (1) an exigent circumstance merits it, and (2) the debtor
requested services from an approved provider but was unable to obtain them
within 5 days. If the exemption is granted, the debtor has up to 30 days
after filing the petition to complete the counseling requirement. However
the court may, for cause, extend the 30-day grace period by up to an
additional 15 days. 11 U.S.C. S 109(h)(3).
^7 See, for example, U.S. Senate Committee on Homeland Security and
Governmental Affairs, Permanent Subcommittee on Investigations.
Profiteering in a Non-profit Industry: Abusive Practices in Credit
Counseling (Washington, D.C.: Mar. 24, 2004).
^8 FTC v. AmeriDebt, Inc. et al., Civil Action No.: PJM 03-3317 (D. Md.
2006) available at
[45]http://www.ftc.gov/os/caselist0223171/0223171ameridebt.htm ; FTC v.
Better Budget Financial Services, Inc. et al., Civ. No. 04-12326 (WGY) (D.
Mass 2005) available at
[46]http://www.ftc.gov/os/caselist/0412326/0412326.htm ); FTC v. Debt
Management Foundation Services, Inc., et al., Case No.:
8:04-CIV-1674-T-17-MSS (M.D. FL. 2005) available at
[47]http://www.ftc.gov/os/caselist/0423029/0423029.htm ); FTC v. National
Consumer Council, Inc et al., Civ. No. SACV04-0474CJC (JWJX) (C.D. Ca.
2005) available at [48]http://www.ftc.gov/os/caselist/0323185/0323185.htm
.
^9 Treasury Inspector General for Tax Administration, Abuses in the
Tax-Exempt Credit Counseling Industry Are Being Addressed, but Further
Actions Are Needed to Ensure Overall Industry Compliance, Reference
Number: 2006-10-081 (Washington, D.C.: May 2006).
^10The Pension Protection Act of 2006 amended section 501 of the Internal
Revenue Code to establish additional requirements that credit counseling
organizations must satisfy in order to qualify for tax-exempt status under
either section 501(c)(3) or section 501(c)(4). See Pub. L. No. 109-280, S
1220, 120 Stat. 780, 1086-89 (2006) (to be codified at 26 U.S.C. S
501(q)). For example, an organization is prohibited from making loans
(other than interest-free loans) to debtors. The additional requirements
will not apply to 501(c)(3) and 501(c)(4) organizations existing before
the enactment of the Pension Protection Act until after August 17, 2007.
An IRS official noted that the revocations of credit counseling agencies'
tax-exempt status were not related to changes made by the Pension
Protection Act.
^11 When IRS issues a determination letter proposing revocation or
modification of an organization's tax-exempt status, the organization may,
within 30 days of the date of the letter, appeal to the Office of the
Regional Director of Appeals. If no appeal is filed, the taxpayer is sent
a letter giving the taxpayer 90 days to file a petition in U.S. Tax Court,
U.S. Claims Court, or the U.S. District Court for the District of
Columbia.
^12 Nonprofit status is a state law concept. The Bankruptcy Act does not
require that a credit counseling agency be qualified as a 501(c)(3)
tax-exempt organization in order to be an approved provider. However,
because most federal tax-exempt organizations are nonprofit organizations,
an organization's federal tax-exempt status is one factor considered by
the Trustee Program in determining an agency's nonprofit status for
purposes of being an approved provider.
^13 Application Procedures and Criteria for Approval of Nonprofit Budget
and Credit Counseling Agencies and Approval of Providers of a Personal
Financial Management Instructional Course by United States Trustees, 71
Fed. Reg. 38076 (2006) (interim final rule).
^14 Section 106(e) of the Bankruptcy Act amended the bankruptcy code to
require that prefiling credit counseling agencies must provide counselors
with adequate training and experience in providing credit counseling. 11
U.S.C. S111(c)(2)(F). The interim final rule specifies that a counselor
will be deemed to have "adequate training and experience" if the counselor
is accredited or certified by a recognized independent organization, or
has successfully completed a course of study acceptable to the Trustee
Program and has worked a minimum of 6 months in a related area. 71 Fed.
Reg. at 38078-79 (to be codified at 28 C.F.R. S 58.15(f)(2)).
^15 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. S 58.17).
^16 71 Fed. Reg. at 38082 - 84 (to be codified at 28 C.F.R. S 58.25).
^17 OMB No. 1105-0084 (Exp. 12/31/2005), Application for Approval as a
Nonprofit Budget and Credit Counseling Agency, and OMB No. 1105-0085 (Exp.
12/31/2005), Application for Approval as a Provider of a Personal
Financial Management Instruction Course.
^18 Of the 32 approved applications we reviewed, 15 were for credit
counseling and 17 were for debtor education, and they represented
approximately 77 percent and 67 percent, respectively, of the certificates
issued between January 9, 2006, and October 17, 2006. Of the 11 denied
applications we reviewed, 6 were for credit counseling and 5 were for
debtor education.
^19 The data related to providers' experience and accreditation were
provided by the Trustee Program and are as of March 2006, when there were
142 providers. The National Foundation for Credit Counseling includes more
than 100 nonprofit member agencies, many of which use the name "Consumer
Credit Counseling Service(R)." Its member agency counselors must complete
training in its Counselor Certification Program. The Council on
Accreditation is an independent, third-party, not-for-profit accrediting
organization that has reviewed more than 1,500 social service programs to
ensure compliance with best-practices standards.
^20 Organizations that qualify for tax-exempt status under Internal
Revenue Code section 501(c)(3) are exempt from certain federal and state
consumer protection laws. For example, 501(c)(3) corporations are not
subject to the Credit Repair Organizations Act, which imposes restrictions
on credit repair organizations aimed at protecting the public from unfair
or deceptive advertising and business practices. See 15 U.S.C. SS 1679 et
seq. Generally, a credit repair organization is defined as any person who
provides, for a fee, services for the express or implied purpose of
improving a consumer's credit record, credit history, or credit rating. 15
U.S.C. S 1679a(3).
^21 According to Trustee Program data, 939,193 credit counseling and
debtor education certificates were issued between January 9, 2006, and
October 17, 2006. The program does not have data on the number of
certificates issued between October 17, 2005, when the counseling and
education requirements went into effect, and January 9, 2006.
^22To qualify for exemption from federal income tax under section
501(c)(3), an organization must be organized and operated exclusively for
one or more exempt purposes specified by statute, such as religious,
charitable, scientific, literary, or educational purposes. On May 9, 2006,
IRS issued a Chief Counsel Advice Memorandum (CCA 200620001) that provided
a legal framework to determine whether a credit counseling organization
that offers counseling and debt management plans to the general public
operates in furtherance of educational purposes consistent with section
501(c)(3).
^23 Because these four agencies were under active examination at the time
of our review, IRS and the Trustee Program did not provide us with the
identities of these four providers or information on the status of their
examinations.
^24 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. S 58.16(i)(1)).
^25 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. S 58.16(i)(4)(i)).
^26 71 Fed. Reg. at 38080 (to be codified at 28 C.F.R. S 58.15(h)(3)).
^27 As noted earlier, roughly 6 percent of the credit counseling agencies
approved by the Trustee Program are not tax exempt under section 501(c)(3)
of the Internal Revenue Code, although they are nonprofit organizations
under other applicable state laws.
^28 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. S 58.17(f)(8)).
^29 According to a Trustee Program official, the statutory language
requiring a "briefing. . . that outline[s] opportunities for available
credit counseling" has been interpreted by the Trustee Program and
providers involved to mean a credit counseling session. 11 U.S.C. S
109(h)(1).
^30 See 71 Fed. Reg. at 38079 (2006) (to be codified at 28 C.F.R. S 58.15
(f)).
^31 Percentage does not add up to 100 due to rounding.
^32M. Staten and J. Barron, Evaluating the Effectiveness of Credit
Counseling. Phase One: The Impact of Delivery Channels for Credit
Counseling Services (May 31, 2006). The study reviewed traditional credit
counseling rather than counseling provided to satisfy the requirements of
the Bankruptcy Act.
^33 H.R. Conf. Rep. No. 109-31, Part I, at p. 2 (2005).
^34 H.R. Conf. Rep. No. 109-31, Part I, at p. 18 (2005).
^35 Financial Literacy and Education Commission, Taking Ownership of the
Future: The National Strategy for Financial Literacy (Washington, D.C.:
April 2006), pp. 31, 32, and 38.
^36 The number of bankruptcy filings increased substantially just prior to
the implementation of the Bankruptcy Act because many consumers believed
it would be more difficult to receive bankruptcy protection once the act
went into effect, according to organizations representing bankruptcy
attorneys and other observers we spoke with. Debtors filing for bankruptcy
shortly after the implementation of the act may therefore not be
representative of future debtors.
^37 As of January 2007, providers must submit data semiannually to the
Trustee Program on the number of their prefiling credit counseling clients
who enter into debt management plans. In addition, the Trustee Program's
Quality Service Reviews will examine information on the outcomes of
counseling sessions at selected providers. However, the information these
sources will provide is limited, in large part because providers do not
track whether their clients subsequently filed for bankruptcy.
^38 Data on the number of certificates issued were provided by the Trustee
Program and cover January 9 through July 3, 2006. Data on the number of
bankruptcy petitions filed were provided by the Administrative Office of
the U.S. Courts and cover January 1 through June 30, 2006.
^39 Section 105 of the Bankruptcy Act requires the Trustee Program to
develop a debtor education course that can be used to satisfy the debtor
education requirement. The act required the program to pilot the
curriculum and materials in six judicial districts for 18 months. The
Trustee Program is required to test the effectiveness of the course along
with a sample of existing consumer education programs and report its
findings to Congress. Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, S105, 119 Stat. 23, 36-37.
^40 For example, see GAO, Program Evaluation: OMB's PART Reviews Increased
Agencies' Attention to Improving Evidence of Program Results,
[49]GAO-06-67 (Washington, D.C.: Oct. 28, 2005); Results-Oriented
Government: GPRA Has Established a Solid Foundation for Achieving Greater
Results, [50]GAO-04-38 (Washington, D.C.: Mar. 10, 2004); and Managing for
Results: Using GPRA to Assist Congressional and Executive Branch
Decisionmaking, [51]GAO/T-GGD-97-43 (Washington, D.C.: Feb. 12, 1997).
^41 See 11 U.S.C. S 111(d)(1)(C).
^42 71 Fed. Reg. at 38082 (to be codified at 28 C.F.R. S 58.25(f)).
^43 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, S
105, 119 Stat. 23, 36-37.
^44 Executive Office for U.S. Trustees, U.S. Department of Justice,
Financial Education: Principles and Practices (Washington, D.C.: March
2006). The judicial districts in which the curriculum was tested were the
Northern District of Illinois, District of New Jersey, Northern District
of Texas, Eastern District of Virginia, Western District of Virginia, and
Eastern District of Washington.
^45 Chapter 13 trustees administer cases filed under Chapter 13 of the
Bankruptcy Code. The National Association of Chapter 13 Trustees is a
nonprofit membership organization that includes Chapter 13 Trustees and
staff, attorneys, judges, and other related professionals.
^46 11 U.S.C. SS 111(c)(2)(B) and 111(d)(1)(E). See also Pension
Protection Act of 2006 S1220 (to be codified at 26 U.S.C. S 501(q))
(imposing requirements regarding fees charged by credit counseling
organizations that are tax exempt under Internal Revenue Code S
501(c)(3)).
^47 71 Fed. Reg. at 38078-79 and 38082-83 (to be codified at 28 C.F.R. SS
58.15(e) and 58.25(j)).
^48 National Foundation for Credit Counseling, Consumer Counseling and
Education Under BAPCPA: Year One Report (Silver Spring, Md.: Oct. 16,
2006). This report provided data on the agencies' average revenue per
session, which factored in cases where fees were reduced or waived.
However, the foundation provided us with the underlying data from its
survey, which we used to determine the average price charged to consumers
who did not have their fees reduced or waived.
^49 See 28 U.S.C. S 1930(f).
^50 In re Petit-Louis, 338 B.R. 132 (Bankr.S.D.Fla. 2006) (finding that a
petitioner who was fluent in Creole was entitled to a waiver of the
prefiling counseling requirement where no approved provider in the
judicial district in which the petitioner resided offered counseling
services in the Creole language).
^51 If a provider offers sessions in Spanish, this information is included
in the main listing for the provider; for 29 other languages, consumers
can conduct a search via a drop-down menu.
^52 The seven bankruptcy courts surveyed by the Administrative Office of
the U.S. Courts at our request were the Central District of California,
the Northern District of California, the District of Colorado, the
District for the District of Columbia, the Northern District of Illinois,
the Northern District of Texas, and the Western District of Washington.
These seven courts were chosen to represent different regions of the
country. Because of the small sample size, information from these courts
provides anecdotal information but cannot be projected to represent all
bankruptcy courts.
^53 Federal Judicial Center, "Implementing the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005: Early Experience" (May 17, 2006). The
survey was conducted by the Federal Judicial Center--the education and
research agency for the U.S. Courts--in March 2006 to collect information
about judges' early experiences with the credit counseling requirement.
The survey was sent to 312 active and 29 former bankruptcy judges; 157 of
these responded to the survey.
^54 For example, see GAO, Financial Literacy and Education Commission:
Further Progress Needed to Ensure an Effective National Strategy,
[52]GAO-07-100 (Washington, D.C.: Dec. 4, 2006) and Highlights of a GAO
Forum: The Federal Government's Role in Improving Financial Literacy,
[53]GAO-05-93SP (Washington, D.C.: Nov. 15, 2004).
Agency Comments
We provided a draft of this report to the Administrative Office of
the U.S. Courts, Department of Justice, and IRS for comment. These
agencies provided technical comments that we incorporated as
appropriate. In addition, on behalf of the Department of Justice,
the Executive Office for United States Trustees provided a written
response, which is reprinted in appendix III.
In its comment letter, the Trustee Program said that it concurred
with our recommendation to develop a mechanism that would allow
the program or other parties to track the outcomes of prefiling
credit counseling. The program noted that it already collects
certain outcome data from providers through mechanisms such as its
reapplication process and quality service reviews. It said it
plans to refine and expand its current tracking and data
collection methods and explore the feasibility of developing more
comprehensive outcome measures. The Trustee Program also concurred
with our recommendation related to issuing formal guidance on what
constitutes ability to pay. The program said that it will
promulgate formal fee waiver guidance in a rulemaking later this
year and will study the fee waiver variations among approved
providers.
As agreed with your offices, unless you publicly announce the
contents of this report earlier, we plan no further distribution
of it until 30 days from the date of this letter. We will then
send copies of this report to the Director of the Administrative
Office of the U.S. Courts, the Attorney General, the Commissioner
of Internal Revenue, and interested congressional committees. We
will also make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web
site at [36]http://www.gao.gov .
If you or your staffs have any questions concerning this report,
please contact me at (202) 512-8678 or jonesy@gao.gov .
Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this report. GAO
staff who made major contributions to this report are listed in
appendix IV.
Yvonne D. Jones
Director, Financial Markets and Community
Investment
List of Requesters
The Honorable Patrick Leahy
Chairman
Committee on the Judiciary
United States Senate
The Honorable John Conyers, Jr.
Chairman
Committee on the Judiciary
House of Representatives
The Honorable Richard J. Durbin
The Honorable Russell D. Feingold
The Honorable Edward M. Kennedy
United States Senate
The Honorable Howard L. Berman
The Honorable William D. Delahunt
The Honorable Chris Van Hollen
The Honorable Sheila Jackson Lee
The Honorable Zoe Lofgren
The Honorable Jerrold Nadler
The Honorable Robert C. Scott
The Honorable Debbie Wasserman Schultz
The Honorable Melvin L. Watt
House of Representatives
Appendix I: Scope and Methodology
Our report objectives were to examine (1) the actions taken by the
Trustee Program to approve credit counseling and debtor education
providers; (2) the content and results of the counseling and
education sessions; (3) the fees providers charge for counseling
and education services, and the extent to which these services are
provided regardless of debtors' ability to pay; and (4) the
availability of approved counseling and education services, and
the challenges debtors may face in receiving these services.
To address all of the objectives, we reviewed the provisions of
the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (Bankruptcy Act) related to credit counseling and debtor
education and examined its legislative history. We also reviewed
the July 2006 interim final rule on application procedures and
criteria for approval of credit counseling and debtor education
agencies, and we obtained and reviewed the public comments on this
rule received by the Department of Justice's Trustee Program. We
also interviewed representatives of, and obtained relevant
documentation from, the Trustee Program's Credit Counseling and
Debtor Education Unit, as well as the Federal Trade Commission,
Internal Revenue Service (IRS), Administrative Office of the
United States Courts, and the National Association of Attorneys
General, including representatives from four states. In addition,
we interviewed and collected documents from the American
Bankruptcy Institute; National Association of Consumer Bankruptcy
Attorneys; National Association of Bankruptcy Trustees; National
Association of Chapter 13 Trustees; creditor organizations, such
as the American Bankers Association and the Financial Services
Roundtable; academic researchers; and consumer organizations, such
as the Consumer Federation of America and the National Consumer
Law Center. We also reviewed and analyzed data from the Trustee
Program on complaints received related to credit counseling and
debtor education providers, and the resolution of these
complaints.
Further, we conducted comprehensive interviews with
representatives of 10 providers of credit counseling or debtor
education that had been approved by the Trustee Program. Seven of
these providers had been approved to offer both of these services,
while one offered only credit counseling and two offered only
debtor education. These providers were selected because they
included the three largest providers of each service and
represented a range of different sizes, modes of delivery
(in-person, telephone, and Internet), geographic locations, trade
association affiliations, types of organizations, and years of
experience. These 10 providers represented 62 percent and 53
percent of all prefiling credit counseling and predischarge debtor
education certificates, respectively, that were issued from
January 9, 2006, through October 17, 2006. We obtained from nearly
all of them materials used to facilitate sessions, such as
counselor training manuals, curricula, disclosures, workbooks, and
handouts. In addition, we interviewed representatives of two trade
organizations representing credit counseling agencies, the
National Foundation for Credit Counseling, and the Association of
Independent Consumer Credit Counseling Agencies.
To address all of the objectives, we also reviewed a
nonprobability sample of the Trustee Program's case files for 32
provider applications that were approved and 11 applications that
were rejected. Among the approved applications we reviewed, 15
were for credit counseling and 17 were for debtor education; as of
October 2006, the Trustee Program had approved 153 credit
counseling providers and 268 debtor education providers. Among the
rejected applications we reviewed, 6 were for credit counseling
and 5 were for debtor education; as of October 2006, the Trustee
Program had rejected 96 applications. We did not do a probability
sample because of the limited size of the sample we could review
and because we wanted to ensure that the small sample included all
of the largest providers and specific numbers of other types of
providers. The criteria we used to select the provider application
files included (1) size of the provider, as measured by number of
clients served 12 months prior to applying for Trustee Program
approval, (2) delivery mode (in-person, telephone, and Internet),
(3) type of organization (such as nonprofit agency, educational
institution, or Chapter 13 panel trustee), (4) length of time in
business, (5) trade association affiliation, and (6) geographic
location. The providers represented in our file review had issued
77 and 67 percent, respectively, of all credit counseling and
debtor education certificates issued from January 9 through
October 17, 2006.
The case files we reviewed included, among other things, agencies'
initial applications, protocols, curricula and other guidance used
by counselors and instructors, written materials and disclosures
provided to consumers, fee schedules, and correspondence between
the provider and the Trustee Program. To facilitate the case file
review, we developed a data collection instrument to record
specific information for each case file reviewed. To protect the
confidentiality of agencies whose applications were approved or
rejected, we did not record in our notes or include in our
workpapers any identifying information from these file reviews
(such as agencies' and individuals' names). Instead, we used
unique numeric codes to track, for the purposes of our analysis,
the information associated with individual applicants. We
conducted our review on site at the offices of the Executive
Office for U.S. Trustees.
To address the first objective, in addition to the steps described
above, we reviewed and analyzed the Trustee Program's written
policies, rules, guidance, and procedures for approving credit
counseling and debtor education providers, including the initial
and revised applications and instructions. To determine whether
IRS had revoked the section 501(c)(3) tax-exempt status under the
Internal Revenue Code, or taken other enforcement actions against
providers, we met with IRS officials and reviewed their publicly
available information. To determine if providers had been subject
to other enforcement actions, we met with representatives of the
Federal Trade Commission and selected state investigative
agencies. We also met with the Council of Better Business Bureaus
and obtained Better Business Bureau reports for a selection of
offices of the three largest providers.
To address the second objective, we reviewed and analyzed the
materials used by our sample of providers to facilitate in-person,
telephone, and Internet counseling and debtor education. For
context, we observed a credit counseling session conducted in
person (for which the provider obtained the client's consent) and
listened to a recording of a counseling session conducted by
telephone (which did not allow identification of the client). We
also observed two debtor education sessions conducted by
telephone--one live and one recorded--which did not include the
clients' identities. We also participated, with the provider's
consent, in three mock credit counseling sessions conducted via
the Internet.
To address the third objective, we reviewed guidance provided by
the Trustee Program on its Web site related to fees and fee
waivers. We reviewed and analyzed data maintained by the Trustee
Program related to providers' fees, but we determined that these
data were not reliable. As a result, to learn providers' fees and
waiver policies, we relied largely on testimonial evidence from 10
providers we interviewed. In some cases, we also reviewed fee
information supplied by providers on their Web sites. We also
reviewed a study by the National Foundation for Credit Counseling
that included information on its members' fees for prefiling
counseling and debtor education sessions.
To address the fourth objective, we reviewed available data from
the Trustee Program on the number and characteristics of providers
and analyzed the number and geographic distribution of providers.
We also reviewed the Trustee Program's Web site, which serves as
its primary mechanism for supplying information on which providers
have been approved by the program. We also reviewed a survey of
bankruptcy judges that was conducted by the Federal Judicial
Center in March 2006. Further, at our request, the Administrative
Office of the U.S. Courts gathered information from the bankruptcy
courts in seven judicial districts related to how the court
handles debtors who fail to submit prefiling credit counseling
certificates with their bankruptcy petitions. To better understand
the experience of pro se debtors, we also telephoned bankruptcy
courts in seven judicial districts to inquire about the steps
needed for a bankruptcy filing and reviewed the information and
instructions on Web sites of nine bankruptcy courts. We also
reviewed relevant portions of the Federal Rules of Bankruptcy
Procedure, including the standardized forms, attachments, and
supporting instructions required by the courts to file a
bankruptcy petition. In addition, we reviewed certain decisions
issued by bankruptcy court judges regarding the failures of
bankruptcy filers to fulfill the credit counseling requirement. To
gather additional information on issues related to language, we
met with a representative of an organization that advocates for
improved language access and analyzed the Trustee Program Web site
for the ease with which consumers can identify providers offering
services in foreign languages.
To understand the implementation of the credit counseling and
debtor education provisions in the six judicial districts in
Alabama and North Carolina, we interviewed staff at the
Administrative Office of the U.S. Courts and two bankruptcy
administrators, one in Alabama and one in North Carolina. We also
reviewed provider applications promulgated by the judicial
districts in these two states, as well as the lists maintained by
the six judicial districts of providers that have been approved.
As part of our case file review, we also reviewed materials from
some credit counseling and debtor education providers that had
been approved in one or more of these six districts.
We conducted our review from February 2006 through March 2007 in
accordance with generally accepted government auditing standards.
Appendix II: Implementation of Counseling and Education Provisions
in Alabama and North Carolina
As a result of legislation passed by Congress in 1986, the
administration of bankruptcy cases in Alabama and North Carolina
is overseen by bankruptcy administrators rather than the Trustee
Program. In the six judicial districts in these states, a
bankruptcy administrator, under the Administrative Office of the
U.S. Courts, is responsible for supervising the administration of
bankruptcy cases, including maintaining panels of private
bankruptcy trustees who liquidate debtors' assets and monitor
repayment plans. These administrators are also responsible for
implementing the Bankruptcy Act's credit counseling and debtor
education provisions. To gather information on this implementation
in these two states, we spoke with two bankruptcy administrators,
one in Alabama and one in North Carolina, and an official of the
Administrative Office of the U.S. Courts.
Bankruptcy administrators in Alabama and North Carolina told us
they have largely mirrored the requirements, guidance, and
practices established by the Trustee Program for approving credit
counseling and debtor education providers. They use a slightly
modified version of the Trustee Program's instructions and
application forms, and follow a similar process for reviewing
applications. Unlike the Trustee Program, the bankruptcy
administrators do not require applicants and providers to submit a
written waiver authorizing access to confidential information
about the agency from IRS, although the administrators are
currently considering such a measure.
The six judicial districts in Alabama and North Carolina had
approved between 9 and 14 credit counseling providers and between
10 and 14 debtor education providers, according to information
given on these districts' Web sites as of January 2007.^1 Many of
these providers had also been approved by the Trustee Program to
offer services in other judicial districts, but a few were small,
local organizations that were approved only in one district. None
of the providers approved in these two states had had its
tax-exempt status revoked by IRS. However, an IRS official
confirmed that IRS is examining the tax-exempt status of two
credit counseling agencies approved by bankruptcy administrators
in Alabama and North Carolina. The Administrative Office of the
U.S. Courts told us if a provider's tax-exempt status were to be
revoked, that provider's approval to provide prefiling credit
counseling could be reexamined. In addition, a Trustee Program
official told us that one provider approved in Alabama or North
Carolina had applied but been denied approval by the Trustee
Program because, among other things, its counseling was not found
to be adequate and its board of directors was not found to be
sufficiently independent.
In general, the course content and mode of delivery for credit
counseling and debtor education providers in Alabama and North
Carolina were similar to those in other judicial districts. We
found only two notable differences. First, the Trustee Program
requires that approved Internet-based credit counseling sessions
include a separate component in which the client has individual
communication with a counselor, such as a telephone conversation
or Web-based chat. However, administrators in Alabama and North
Carolina told us their approved credit counseling sessions may be
conducted entirely via the Internet without any direct interaction
between the debtor and a counselor. Second, the fees charged by
providers for credit counseling and debtor education sessions were
typically $25 to $40, according to the administrators, as compared
with an average of roughly $50 in the rest of the nation.
^1 The districts' Web sites varied with respect to how often they updated
their lists of approved providers. Therefore, the specific date for which
these numbers apply ranges, depending on the district, from October 26,
2006 to January 24, 2007.
Appendix III: Comments from the Department of Justice
Now on pp. 18-19.
Now on p. 13.
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Yvonne D. Jones, (202) 512-8678 or [38]jonesy@gao.gov
Staff Acknowledgments
In addition to the contact named above, Jason Bromberg, Assistant
Director; Gwenetta Blackwell-Greer; Anne A. Cangi; Emily R.
Chalmers; Alexandra K. Dew; Melissa J. Jaynes; Carl M. Ramirez;
and Omyra Ramsingh made key contributions to this report.
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Highlights of [55]GAO-07-203 , a report to congressional requesters
April 2007
BANKRUPTCY REFORM
Value of Credit Counseling Requirement Is Not Clear
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
requires individuals to receive credit counseling before filing for
bankruptcy and to take a debtor education course before having debts
discharged. Concerns were raised that the new requirements could expose
consumers to abusive practices by credit counseling agencies or become
barriers to filing for bankruptcy. GAO was asked to examine (1) the
process of approving counseling and education providers, (2) the content
and results of the counseling and education sessions, (3) the fees
charged, and (4) the availability of and challenges to accessing services.
To address these issues, GAO reviewed Trustee Program data and application
case files, and interviewed a wide range of individuals and groups
involved in the bankruptcy process.
[56]What GAO Recommends
The Department of Justice's U.S. Trustee Program, which is responsible for
the new requirements, should (1) develop the capability to track and
analyze the outcomes of prefiling credit counseling, and (2) issue formal
guidance on what constitutes a client's "ability to pay." The Trustee
Program agreed with GAO's recommendations.
The Trustee Program's process for approving credit counseling and debtor
education providers was designed to help ensure that providers met
statutory and program requirements and demonstrated evidence of
proficiency, experience, and reputability. The Bankruptcy Act set certain
standards for providers, and the program's July 2006 rule clarified these
standards and formalized the application review process. As of October
2006, the Trustee Program had approved 153 credit counseling and 268
debtor education providers. These providers have had few formal complaints
lodged against them, and federal and state law enforcement authorities
with whom we spoke did not identify any recent enforcement actions against
them under consumer protection laws. No provider approved by the Trustee
Program had had its federal tax-exempt status revoked, although four
providers' tax-exempt status was being examined by the Internal Revenue
Service.
The content of the required credit counseling and debtor education
sessions generally complied with statutory and program requirements.
Participants in the bankruptcy process largely believed the education
requirement--a general financial literacy course--to be beneficial.
However, the value of the counseling requirement is not clear. The
counseling was intended to help consumers make informed choices about
bankruptcy and its alternatives. Yet anecdotal evidence suggests that by
the time most clients receive the counseling, their financial situations
are dire, leaving them with no viable alternative to bankruptcy. As a
result, the requirement may often serve more as an administrative obstacle
than as a timely presentation of meaningful options. Because no mechanism
currently exists to track the outcomes of the counseling, policymakers and
program managers are unable to fully assess how well the requirement is
serving its intended purpose.
Providers typically charge about $50 per session and evidence suggests
fees are being waived as appropriate for clients unable to pay, as the
Bankruptcy Act requires. Neither the statute nor Trustee Program guidance
defines what constitutes "ability to pay," and policies vary among
providers. Formal guidance on this issue would have several benefits,
including ensuring compliance with a minimum benchmark for waiving fees.
The number of counseling and education providers that have been approved
appears sufficient to allow consumers to access these services in a timely
manner. In-person sessions are available in most parts of the country,
although the great majority of clients fulfill the requirements via
telephone or Internet. The Trustee Program has efforts under way to help
mitigate the challenges speakers of foreign languages can face in
accessing services. Further, the bankruptcy courts have taken steps
recently to help better ensure that filers are aware of the potential
consequences of filing for bankruptcy without the required counseling
certificate.
References
Visible links
49. http://www.gao.gov/cgi-bin/getrpt?GAO-06-67
50. http://www.gao.gov/cgi-bin/getrpt?GAO-04-38
51. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD-97-43
52. http://www.gao.gov/cgi-bin/getrpt?GAO-07-100
53. http://www.gao.gov/cgi-bin/getrpt?GAO-05-93SP
55. http://www.gao.gov/cgi-bin/getrpt?GAO-07-203
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