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 Program�s 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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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
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