United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Commercial 

and Administrative Law, Committee on 

the Judiciary, House of Representatives

BANKRUPTCY REFORM

Value of Credit Counseling 

Requirement Is Not Clear 

Statement of Yvonne D. Jones, Director 

Financial Markets and Community Investment 

For Release on Delivery

Expected at 10:30 a.m. EDT 

Tuesday, May 1, 2007 

 

GAO-07-778T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 1, 2007

BANKRUPTCY REFORM 

Value of Credit Counseling Requirement 

Highlights of GAO-07-778T, a testimony Is Not Clear 

before the Subcommittee on Commercial 

and Administrative Law, Committee on the 

Judiciary, House of Representatives 

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.

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. 

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 JonesY@gao.gov. 
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

 1

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

2

GAO, Bankruptcy Reform: Value of Credit Counseling Requirement Is Not Clear, 

GAO-07-203 (Washington, D.C.: Apr. 6, 2007).

3

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 § 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.

4

In 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. 

Page 1 GAO-07-778T 
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: 

• 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.

• 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 

Page 2 GAO-07-778T 
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. 

• 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. 

• 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. 

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 

Background 

Page 3 GAO-07-778T 
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: 

• 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

• 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 

 5

Bankruptcy cases in Alabama and North Carolina are not under the jurisdiction of the

Trustee Program and are administered instead by bankruptcy administrators in the judicial 

districts in those states. 

6

11 U.S.C. § 109(h). 

7

Consumers usually file for bankruptcy under one of two chapters of the Bankruptcy Code.

Under Chapter 7, the debtor’s eligible assets are liquidated (reduced to cash) and

distributed to creditors in accordance with the procedures mandated by the court. Under 

Chapter 13, debtors file a repayment plan with the court agreeing to pay their debts over

time, usually 3 to 5 years. 

Page 4 GAO-07-778T 
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. 

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 

The Trustee 

Program’s Process for 

Screening Providers 

Is Designed to Help

Ensure Statutory and 

Program 

Requirements Are Met 

 8

Nonprofit status is a state law concept. The Bankruptcy Act does not require that a credit 

counseling agency be qualified as a 501(c)(3) tax-exempt organization in order to be an

approved provider. However, 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. 

9

Application Procedures and Criteria for Approval of Nonprofit Budget and Credit 

Counseling Agencies and Approval of Providers of a Personal Financial Management 

Instructional Course by United States Trustees, 71 Fed. Reg. at 38076 – 38085 (2006). 

Qualifications for credit counseling providers, see 71 Fed. Reg. at 38078 - 38080 (to be

codified at 28 C.F.R. § 58.15). Qualifications for debtor education providers, see 71 Fed.

Reg. at 38082 - 38084 (to be codified at 28 C.F.R. § 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. 

Page 5 GAO-07-778T 
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. 

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 taxexempt 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 

 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. 

Page 6 GAO-07-778T 
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 

 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. 

Page 7 GAO-07-778T 
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. 

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.

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. 

Counseling and 

Education Sessions 

Meet Statutory and 

Program 

Requirements, but a 

Wide Range of 

Observers Question 

the Value of the 

Counseling Session 

Credit Counseling Sessions 

Are Designed to Provide 

Debtors with 

Individualized 

Assessments 

 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. § 109(h)(1). 

Page 8 GAO-07-778T 
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’ 

 15Percentage does not add up to 100 due to rounding. 

Page 9 GAO-07-778T 
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. 

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 

Many Question the Value 

of the Counseling 

Requirement, but Data on 

Outcomes Are Limited 

 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. 

18H.R. Rep. No. 109-31, Part I, at p. 2 (2005). 

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

Page 10 GAO-07-778T 
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. 

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 

 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.

Page 11 GAO-07-778T 
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. 

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. 

Debtor Education Sessions 

Are Designed to Offer 

Financial Management 

Skills 

 22For example, see GAO, Program Evaluation: OMB’s PART Reviews Increased Agencies’

Attention to Improving Evidence of Program Results, GAO-06-67 (Washington, D.C.: Oct. 

28, 2005); Results-Oriented Government: GPRA Has Established a Solid Foundation for 

Achieving Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004); and Managing 

for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking, 

GAO/T-GGD-97-43 (Washington, D.C.: Feb. 12, 1997). 

23See 11 U.S.C. § 111(d)(1)(C). 

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

Page 12 GAO-07-778T 
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. 

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. 

Provider Fees Are 

Generally Considered 

Reasonable, Although 

Fee Waiver Policies 

Vary

 25For example, see GAO, Financial Literacy and Education Commission: Further 

Progress Needed to Ensure an Effective National Strategy, GAO-07-100 (Washington, D.C.: 

Dec. 4, 2006) and Highlights of a GAO Forum: The Federal Government’s Role in

Improving Financial Literacy, 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. §§ 58.15(e) and 58.25(j)). 

Page 13 GAO-07-778T 
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. 

Page 14 GAO-07-778T 
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 

The Supply of 

Providers Appears 

Sufficient, and 

Actions Are Under 

Way to Address the 

Challenges Some 

Consumers May Face 

Fulfilling the 

Requirements 

Page 15 GAO-07-778T 
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. 

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. 

Contacts and 

Acknowledgments 

Page 16 GAO-07-778T (250342) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER