Bankruptcy Reform: Value of Credit Counseling Requirements Is Not
Clear (01-MAY-07, GAO-07-778T). 				 
                                                                 
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. This testimony is based on GAO's report issued last  
month, and addresses (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-07-778T					        
    ACCNO:   A68965						        
  TITLE:     Bankruptcy Reform: Value of Credit Counseling	      
Requirements Is Not Clear					 
     DATE:   05/01/2007 
  SUBJECT:   Bankruptcy 					 
	     Consumer education 				 
	     Consumer protection				 
	     Credit bureaus					 
	     Debt						 
	     Debt collection					 
	     Fees						 
	     Investigations by federal agencies 		 
	     Policy evaluation					 
	     Program evaluation 				 
	     Reporting requirements				 
	     Standards						 
	     Strategic planning 				 
	     DOJ U.S. Trustee Program				 

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GAO-07-778T

   

     * [1]Background
     * [2]The Trustee Program's Process for Screening Providers Is Des
     * [3]Counseling and Education Sessions Meet Statutory and Program

          * [4]Credit Counseling Sessions Are Designed to Provide Debtors w
          * [5]Many Question the Value of the Counseling Requirement, but D
          * [6]Debtor Education Sessions Are Designed to Offer Financial Ma

     * [7]Provider Fees Are Generally Considered Reasonable, Although
     * [8]The Supply of Providers Appears Sufficient, and Actions Are
     * [9]Contacts and Acknowledgments
     * [10]GAO's Mission
     * [11]Obtaining Copies of GAO Reports and Testimony

          * [12]Order by Mail or Phone

     * [13]To Report Fraud, Waste, and Abuse in Federal Programs
     * [14]Congressional Relations
     * [15]Public Affairs

Testimony

Before the Subcommittee on Commercial and Administrative Law, Committee on
the Judiciary, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:30 a.m. EDT
Tuesday, May 1, 2007

BANKRUPTCY REFORM

Value of Credit Counseling Requirement Is Not Clear

Statement of Yvonne D. Jones, Director
Financial Markets and Community
Investment

GAO-07-778T

Madam Chairwoman and Members of the Subcommittee:

I appreciate the opportunity to participate in today's hearing on the
impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (Bankruptcy Act).^1 My statement today focuses on the credit
counseling and debtor education requirements of the act and is based on
our report that was released last month and prepared at the request of
members of the Senate and House Judiciary Committees.^2

Among other things, the Bankruptcy Act requires individuals to receive
credit counseling before filing for bankruptcy and to take a debtor
education course before having their debts discharged.^3 According to the
legislative history of the act, a goal of the prefiling credit counseling
requirement, which became effective in October 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 part due to ongoing investigations of certain practices
within the credit counseling industry, such as steering clients into
inappropriate debt repayment plans. In addition, some members of Congress
and others were 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 required in the
Bankruptcy Act that providers of credit counseling and debtor education
courses meet certain criteria and obtain approval from the Department of
Justice's U.S. Trustee Program (the Trustee Program).^4

^1Pub. L. No. 109-8, 119 Stat. 23 (2005) (amending various sections of
Title 11).

^2GAO, Bankruptcy Reform: Value of Credit Counseling Requirement Is Not
Clear, [16]GAO-07-203 (Washington, D.C.: Apr. 6, 2007).

^3Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 S 106,
119 Stat. 37-42. Specifically, the statute requires (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. For the purposes of this statement, 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.

^4In this statement, 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
statement refer collectively to the U.S. Trustees and the Executive Office
for U.S. Trustees.

My statement discusses (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. Our report,
and this testimony, are based on extensive audit work that included, among
other things, a review of relevant policies, rules, guidance, and
procedures; a case file review of a nonprobability sample of 43 providers
approved by the Trustee Program; and interviews with representatives of
relevant federal and state agencies, trade associations, consumer groups,
and 10 approved providers of credit counseling or debtor education. 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.

In summary:

           o We found the Trustee Program's process for approving credit
           counseling and debtor education providers was generally systematic
           and thorough, and designed to help ensure that the 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
           interim final 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. As of the date of our report, no provider approved by the
           Trustee Program had had its federal tax-exempt status revoked.
           However, the Internal Revenue Service (IRS) was examining the
           tax-exempt status of four providers, and Trustee Program officials
           said that they were carefully monitoring the situation.
           o 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. In addition, we did not find evidence
           that prefiling credit counseling agencies discouraged clients from
           filing for bankruptcy, and very few clients appeared to be
           entering into debt repayment plans administered by these agencies.
           However, the value of the credit 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 counseling
           sessions--including how often they are followed by a bankruptcy
           filing--policymakers and program managers are unable to fully
           assess how well the requirement is serving its intended purpose.
           Our report recommends that the Trustee Program develop the
           capability to track and analyze the outcomes of prefiling credit
           counseling. In responding to a draft of our report, the Trustee
           Program said it concurred with this recommendation.
           o Providers typically charge about $50 or less per session, and
           industry observers and consumer advocates we spoke with generally
           considered this amount to be reasonable. Evidence suggests fees
           are being waived as appropriate for clients unable to pay, as the
           Bankruptcy Act requires. Neither the statute nor the Trustee
           Program guidance defines what constitutes "ability to pay," and
           policies vary among providers. Our report recommends that the
           Trustee Program issue formal guidance on what constitutes ability
           to pay, so as to help reduce uncertainty among providers about
           when to waive fees and to provide a minimum benchmark for reducing
           or waiving fees. The program concurred with our recommendation.
           o The number of approved counseling and education providers
           appears to be sufficient to allow consumers to access these
           services in a timely manner. Three large nationwide organizations
           represent about half of the market for both services. In-person
           counseling and education sessions are not available in certain
           parts of the country, but the great majority of clients seek to
           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 measures recently--on
           their filing forms and Web sites--to make the prefiling counseling
           requirement more conspicuous to filers who are not represented by
           an attorney.
		   
		   Background

           Federal courts have jurisdiction over bankruptcy cases and
           petitions can be filed in any one of the nation's 94 judicial
           districts. The Trustee Program, a component of the Department of
           Justice, oversees the bankruptcy process for most of these
           districts and acts to ensure compliance with applicable laws and
           procedures.^5 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
           adding new credit counseling and debtor education requirements, as
           follows:

           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.^7

           The Bankruptcy Act 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.

           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. The Federal Trade
           Commission (FTC) and others have noted that many credit counseling
           agencies operate honestly and fairly and provide valuable services
           to financially distressed consumers. However, starting in the
           1990s consumer complaints about some participants in the credit
           counseling industry spurred federal and state investigations into
           the activities of many credit counseling agencies. Over the past
           few years, the FTC has settled enforcement actions against several
           agencies, and the IRS has undertaken a broad examination effort of
           credit counseling organizations for compliance with the Internal
           Revenue Code.
		   
^5Bankruptcy 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.

^611 U.S.C. S 109(h).

^7Consumers 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. Under Chapter 13, debtors file
a repayment plan with the court agreeing to pay their debts over time,
usually 3 to 5 years.

           The Trustee Programï¿½s Process for Screening Providers Is Designed
		   to Help Ensure Statutory and Program Requirements Are Met

           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. For example, with regard to credit counseling,
           the Trustee Program may approve only entities that are nonprofit
           organizations, have an independent board of directors, provide
           full disclosures to clients on certain items, and provide trained
           counselors with adequate experience.^8 The act required the
           Trustee Program to undertake a thorough review of the
           qualifications of a credit counseling or debtor education agency
           before approving it to provide services. In July 2006, the Trustee
           Program adopted an interim final rule setting forth application
           procedures designed to ensure that only organizations meeting the
           minimum qualification standards set forth in the Bankruptcy Act
           would be approved to provide services.^9

           To implement the relevant provisions of the Bankruptcy Act, the
           Trustee Program established its Credit Counseling and Debtor
           Education Unit in June 2005 and developed a process for approving
           providers.^10 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 that is used to
           evaluate the agencies' qualifications, including the written
           materials the agencies use in providing credit counseling services
           and information on debt management plans serviced by the
           agency.^11 In addition, applicants must disclose information about
           their nonprofit status and any actions that have affected the
           organization, including any revocations of licenses or
           accreditations, investigations, and legal, disciplinary or
           enforcement actions.
		   
^8Nonprofit 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, 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.

^9Application 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. at 38076 - 38085 (2006). Qualifications for credit counseling
providers, see 71 Fed. Reg. at 38078 - 38080 (to be codified at 28 C.F.R.
S 58.15). Qualifications for debtor education providers, see 71 Fed. Reg.
at 38082 - 38084 (to be codified at 28 C.F.R. S 58.25).

^10OMB 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.

^11Debt management plans refer to repayment programs offered by some
credit counseling agencies. Under these plans, consumers pay off their
unsecured debts by making a single, consolidated payment that the agency
uses to disburse funds to creditors.		   

           In general, we 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. For
           example, the review process includes measures to evaluate the
           applicants' character and standing in the credit counseling
           industry. In particular, 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. In
           some cases we reviewed, the Trustee Program required applicants to
           make modifications to their programs or processes, such as adding
           additional material to the disclosure statements provided to
           clients, before it would approve the providers.

           As of October 2006, the Trustee Program had approved 153 credit
           counseling providers. As required by statute, all of these
           providers were nonprofit organizations, and about 94 percent of
           them had federal tax-exempt status under section 501(c)(3) of the
           Internal Revenue Code. The program had also approved 268 debtor
           education providers by October 2006, of which at least one-third
           were organizations exempt under section 501(c)(3). Many providers
           were approved for both credit counseling and debtor education, and
           three large nationwide companies have provided about half of the
           sessions for both of these services.

           There have been relatively few complaints raised about providers'
           competence or integrity. 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 credit counseling providers subsequent to their approval.
           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.
           Our analysis found that many of the complaints were related to
           administrative issues, such as the timely issuance of a debtor's
           certificate. Twenty complaints alleged unfair or inappropriate
           practices, such as giving legal advice, discouraging customers
           from filing for bankruptcy, or failing to inform clients about the
           possibility of a fee waiver. Our review of a selection of
           complaints found that the Trustee Program took action to assess
           and follow up on each complaint. In no case did a complaint result
           in the Trustee Program removing a provider from the approved list,
           according to a program official.

           As part of its Credit Counseling Compliance Project, which began
           in October 2003, IRS began a broad examination effort of the
           entire credit counseling industry, focusing on whether agencies
           met the requirements for federal tax exemption under section
           501(c)(3) of the Internal Revenue Code.^12 As of March 2007, IRS
           had completed 47 examinations, which in all cases resulted in
           either revocation, proposed revocation, or other termination of
           the agencies' tax-exempt status. The IRS noted that these
           revocations occurred because these organizations served primarily
           to get clients into debt management plans, offered little or no
           counseling or education, and appeared to be motivated mostly by
           profit.

           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 although
           the Trustee Program was aware of the ongoing IRS examinations of
           these four agencies, it approved their applications to become
           counseling providers because the agencies had satisfied the
           qualification requirements of the Bankruptcy Act and the Trustee
           Program's interim final rule.^13 The official said that should IRS
           revoke an agency's tax-exempt status, the program would carefully
           review the reasons for the revocation and take whatever actions
           the program deemed appropriate.

^12To 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.

           Counseling and Education Sessions Meet Statutory and Program
		   Requirements, but a Wide Range of Observers Question the Value
		   of the Counseling Session		   

           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.
           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 have questioned the
           value of the credit counseling requirement since by the time most
           clients received the counseling their financial situations were
           dire, leaving them with no realistic alternative to bankruptcy. By
           contrast, most observers we spoke with believed that the
           predischarge debtor education requirement--a general financial
           literacy course--was 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."^14 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. 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 had provided for many years.
		   
^13Because 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.

^1411 U.D.C. S 109(h)(1).

           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. Credit counseling sessions generally began with
           providers collecting data on the client's finances, including
           sources and amount of income, debt, and expenses. 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. When the sessions were over, counselors
           issued certificates verifying that the client has completed the
           prefiling credit counseling requirement.

           Although most providers offered clients the option of conducting
           credit counseling sessions in person, available data indicated
           that most debtors fulfilled 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.^15 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. We
           did not find any significant research on the effectiveness of
           credit counseling facilitated via the Internet. To receive
           counseling using this method, 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.

           Prior to passage of the Bankruptcy Act, some consumer advocacy
           groups, policymakers, and others expressed concerns that credit
           counseling provided under the 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--fewer than 2 percent--receiving prefiling
           credit counseling have entered into any debt management plan.^16
           In general, representatives of consumer groups, panel trustees,
           and others told us that they had not observed cases where
           prefiling counseling agencies inappropriately encouraged clients
           to avoid filing for bankruptcy.^17 As of October 2006, the Trustee
           Program had received only five formal complaints--out of more than
           650,000 credit counseling certificates issued--alleging that
           providers made harmful or inappropriate recommendations.
		   
^15Percentage does not add up to 100 due to rounding.	

^16Anecdotal evidence we gathered was corroborated by a survey by the
National Foundation for Credit Counseling of its member agencies
indicating that about 3 percent of clients who signed up for prefiling
counseling from October 2005 through August 2006 enrolled in a debt
management plan.

^17Panel trustees and standing trustees are overseen by the Trustee
Program and administer individual Chapter 7 and Chapter 13 bankruptcy
cases, respectively.

           Many Question the Value of the Counseling Requirement, but Data
		   on Outcomes Are Limited

           The report of the House of Representatives Committee on the
           Judiciary that accompanied the bill that became 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."^18 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.^19

           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 whom we
           spoke with--including representatives of federal agencies and
           bankruptcy attorneys; 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 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 started, in order to avoid potential
           bankruptcy.^20 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 on their homes. As such,
           anecdotal evidence indicates that the great majority of clients
           receiving prefiling counseling have few viable alternatives to
           bankruptcy.^21 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.
		   
^18H.R. Rep. No. 109-31, Part I, at p. 2 (2005).

^19H.R. Rep. No. 109-31, Part I, at p. 18 (2005).

^20Financial 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.

^21The 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.		   

           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 tracks how many consumers who receive credit counseling
           subsequently file for bankruptcy. A Trustee Program official told
           us that the program had not taken steps to track and monitor these
           outcomes because doing so was not part of its statutory
           responsibilities. As we have reported in the past, meaningful data
           on program outcomes and costs are essential for appropriate
           oversight and decision making.^22 Without reliable data on the
           outcomes of the prefiling credit counseling sessions, policymakers
           and program managers lack the information that would allow them to
           determine how well the statutory requirement is truly serving to
           inform consumers about their options. In our report, 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. 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. In commenting on a draft of our report, the Trustee
           Program said that it concurred with this recommendation and noted
           that it plans to refine and expand its current tracking and data
           collection methods, as well as explore the feasibility of
           developing more comprehensive outcome measures.
		   
		   Debtor Education Sessions Are Designed to Offer Financial
		   Management Skills

           The debtor education requirement is described in the Bankruptcy
           Act as an "instructional course concerning personal financial
           management," which may be provided in person, by telephone, or via
           the Internet.^23 The Trustee Program's interim final rule
           specified that the course should include written information and
           instruction on four major topics: budget development, money
           management, wise use of credit, and consumer information.^24 We
           reviewed the debtor education curricula, teaching guides, and
           other materials from 17 debtor education providers, and found that
           the content included the topics and elements that the Trustee
           Program required. Trustee Program data collected on certificates
           issued between July 11 and October 17, 2006, indicated that 50
           percent of predischarge education sessions were conducted by
           Internet, 29 percent via telephone, and 21 percent in person.
		   
^22For example, see GAO, Program Evaluation: OMB's PART Reviews Increased
Agencies' Attention to Improving Evidence of Program Results,
[23]GAO-06-67 (Washington, D.C.: Oct. 28, 2005); Results-Oriented
Government: GPRA Has Established a Solid Foundation for Achieving Greater
Results, [24]GAO-04-38  (Washington, D.C.: Mar. 10, 2004); and Managing
for Results: Using GPRA to Assist Congressional and Executive Branch
Decisionmaking, [25]GAO/T-GGD-97-43  (Washington, D.C.: Feb. 12, 1997).

^23See 11 U.S.C. S 111(d)(1)(C).

^2471 Fed. Reg. at 38082 (to be codified at 28 C.F.R. S 58.25(f)).

           Most representatives of consumer groups, bankruptcy attorneys, and
           other observers we spoke with believed that the predischarge
           debtor education course was likely to help improve consumers'
           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 for current and future
           generations.^25 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.
		   
		   Provider Fees Are Generally Considered Reasonable, Although Fee
		   Waiver Policies Vary

           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. Trustee Program staff, providers, and trade association
           representatives told us that most providers charged around $50
           each for their credit counseling and debtor education sessions.
           This estimate was corroborated by survey data collected from 107
           providers by the National Foundation for Credit Counseling.^26
           Representatives of consumer groups and legal organizations, as
           well as academics and others we spoke with, generally believed
           that the fees credit counseling and debtor education providers had
           been charging were reasonable.

           The Trustee Program has required providers to 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.^27 A program
           official told us that providers' waiver policies are reviewed
           during the application process to ensure that they are clear and
           objective, and noted that in some cases applicants had been
           rejected for inadequate fee waiver policies.
		   
^25For example, see GAO, Financial Literacy and Education Commission:
Further Progress Needed to Ensure an Effective National Strategy,
[26]GAO-07-100  (Washington, D.C.: Dec. 4, 2006) and Highlights of a GAO
Forum: The Federal Government's Role in Improving Financial Literacy,
[27]GAO-05-93SP  (Washington, D.C.: Nov. 15, 2004).

^26National 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.

^2771 Fed. Reg. at 38078-79 and 38082-83 (to be codified at 28 C.F.R. SS
58.15(e) and 58.25(j)).
	
           Providers' policies for waiving fees varied. For example, the
           three largest providers used 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.

           The Bankruptcy Act does not specify what constitutes a client's
           "ability to pay." In addition, the Trustee Program has not issued
           formal guidance on determining a client's ability to pay. Some
           providers told us that the lack of guidance left them unsure about
           the criteria they should use and said that additional guidance
           would be beneficial. Eight of the 22 comments to the Trustee
           Program's interim final rule submitted by providers, industry
           associations, and consumer groups requested that the program
           provide guidance or clarification on what constitutes a client's
           ability to pay. Trustee Program officials told us that they were
           considering issuing a rule that would formalize the criteria that
           providers should use to determine clients' ability to pay but that
           they had not made a final decision.

           We believe that clearer guidance on determining clients' ability
           to pay could have several benefits, including reducing uncertainty
           among providers, providing greater transparency, and ensuring
           compliance with minimum standards. As such, our report recommends
           that the Trustee Program issue formal guidance on what constitutes
           ability to pay. In developing this guidance, the program should
           examine the reasons behind the variations among providers in
           waiving fees. In addition, while this guidance should set a
           minimum benchmark for determining when fees should be reduced or
           waived, it should not limit or discourage providers that may wish
           to waive fees for more clients than qualify under the minimum
           benchmark. In its comment letter, the Trustee Program agreed with
           our recommendation and said it will promulgate formal fee waiver
           guidance in a rulemaking later this year.
		   
		   The Supply of Providers Appears Sufficient, and Actions Are Under
		   Way to Address the Challenges Some Consumers May Face Fulfilling
		   the Requirements

           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 the supply of
           credit counseling and debtor education services has been adequate
           to meet the demand for these services. When the Bankruptcy Act
           went into effect in October 2005, the Trustee Program had approved
           71 credit counseling and 76 debtor education providers. By October
           2006, this number had risen to 153 credit counseling and 268
           debtor education providers, including about a dozen that provide
           services nationwide. A wide range of participants in the
           bankruptcy process--including bankruptcy attorneys, 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. Additionally,
           some noted that consumers who called to schedule a credit
           counseling or debtor education session were usually accommodated
           within 24 hours, and sometimes much sooner.

           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. However, this
           concern is somewhat mitigated by the fact that the great majority
           of clients appear to prefer telephone or Internet 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.

           Some policymakers, consumer advocates, and others have expressed
           concern that the credit counseling requirement may 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. Some potential bankruptcy filers may face certain
           challenges in accessing credit counseling and debtor education.
           For example, 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. The Trustee Program
           has ongoing and planned measures in place to allow consumers to
           better identify language and translation services offered by
           providers. The program's Web site now allows users to identify
           providers offering services in any one of at least 29 languages. A
           program official told us that eventually the Web site should allow
           consumers to search, by provider and location, for all languages
           and translation services offered.

           Finally, in some cases, individuals who were not represented by an
           attorney have reportedly attempted to file bankruptcy petitions
           without having met the prefiling credit counseling requirement. To
           help mitigate this issue, the uniform set of Official Bankruptcy
           Forms used by the courts was modified to include a separate
           exhibit that petitioners attach to attest to compliance with the
           requirement. Further, the bankruptcy courts have sought to make
           the requirement more prominent on their Web sites.

           Madam Chairwoman, this completes my prepared statement. I would be
           happy to respond to any questions you or other members of the
           Subcommittee may have at this time.
		   
		   Contacts and Acknowledgments

           For further information on this testimony, please contact Yvonne
           D. Jones at (202) 512-8678. Contact points for our Offices of
           Congressional Relations and Public Affairs may be found on the
           last page of this statement. Individuals making key contributions
           to this testimony include Jason Bromberg, Anne A. Cangi, Emily R.
           Chalmers, Carl M. Ramirez, and Omyra Ramsingh.
		   
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(250342)

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www.gao.gov/cgi-bin/getrpt?GAO-07-778T.

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 GAO-07-778T, a testimony before the Subcommittee on
Commercial and Administrative Law, Committee on the Judiciary, House of
Representatives

May 1, 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. This testimony is based on GAO's report
issued last month, and addresses (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.

[28]What GAO Recommends

In its report, GAO recommended that the Department of Justice's U.S.
Trustee Program, which is responsible for the new requirements, (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 has 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 credit 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 sessions,
policymakers and program managers cannot fully assess how well the
requirement is serving its intended purpose.

Providers typically charge about $50 per session, and evidence suggests
that 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 standard for
waiving fees.

The number of approved counseling and education providers appears
sufficient to allow consumers to access these services in a timely manner.
In-person sessions are not available in certain 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 ensure that filers are aware of the potential
consequences of filing for bankruptcy without the required counseling
certificate.

References

Visible links
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-07-203
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-06-67
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-04-38
  25. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD-97-43
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-100
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-05-93SP
*** End of document. ***