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
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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 Programï¿½s 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 Providersï¿½ 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 Clientsï¿½ 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 Providersï¿½ 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
		   Clientï¿½s 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 [email protected] .
           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][email protected]
		   
		   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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(250274)

www.gao.gov/cgi-bin/getrpt?GAO-07-203 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Yvonne D. Jones at (202) 512-8678 or
[email protected].

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
*** End of document. ***