Bankruptcy Reform: Value of Credit Counseling Requirement Is Not Clear
Released: 2007-04-24T00:00:00

Letter

Background

Bankruptcy is a court procedure designed to help consumers and businesses eliminate debts they cannot pay or repay them with the court’s protection. The filing of a bankruptcy petition in most cases operates as an “automatic stay” that essentially prohibits most creditors from taking any action to attempt to collect a debt pending the resolution of the bankruptcy proceeding. Consumers usually file for bankruptcy under one of two chapters of the Bankruptcy Code. Under Chapter 7, the debtor’s eligible assets are liquidated (reduced to cash) and distributed to creditors in accordance with the procedures mandated by the court. At the end of the process, the debtor’s eligible debts are discharged, which means that creditors may take no further action against the individual to collect the debt. Under Chapter 13, debtors file a repayment plan with the court agreeing to pay their debts over time, usually 3 to 5 years. In these cases, the debtor’s discharge occurs upon completion of all payments under the plan. Personal bankruptcy is designed to give debtors a “fresh start” but is often considered a last resort, in large part because of the adverse effect it has on an individual’s credit record. Most debtors who file for bankruptcy use an attorney, but some debtors represent themselves without the aid of an attorney and are referred to as pro se debtors.

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, is responsible for overseeing the administration of most bankruptcy cases. The program consists of the Executive Office for U.S. Trustees, which provides general policy and legal guidance, oversees operations, and handles administrative functions, as well as 95 field offices and 21 United States Trustees— federal officials charged, among other things, with supervising the administration of federal bankruptcy cases. The Trustee Program also oversees private “panel trustees” and “standing trustees” who administer, respectively, individual Chapter 7 and Chapter 13 bankruptcy cases. Bankruptcy cases in Alabama and North Carolina are not under the jurisdiction of the Trustee Program and are administered instead by bankruptcy administrators in the judicial districts in those states. (See app. II for more information on Alabama and North Carolina.)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law on April 20, 2005, and most of its provisions became effective on October 17, 2005. The act made substantial changes to the Bankruptcy Code, including the addition of new credit counseling and debtor education requirements.

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.

Debtor Education. Prior to discharge of debts, Chapter 7 or Chapter 13 debtors must complete a personal financial management instructional course from an approved provider.

The Bankruptcy Act has designated the Trustee Program as responsible for the implementation of these requirements, including the development of rules and guidance and the certification of approved credit counseling and debtor education entities. Upon completing prefiling counseling or predischarge education, consumers get a certificate from the provider that is submitted to the bankruptcy court as evidence of having fulfilled the requirement.

The credit counseling industry has existed for about 40 years. Credit counseling agencies generally work on behalf of their consumer clients, who are typically deeply in debt, to help them manage their existing financial problems and to teach them better financial management skills for the future. These agencies have historically been community-based nonprofit organizations that charge nothing or solicit modest fees from clients to help defray expenses. In some cases, agencies may offer to put clients in repayment programs, commonly termed debt management plans, where consumers pay off their unsecured debts by making a single, consolidated payment that the agency uses to disburse funds to creditors. Under such plans, creditors often agree to reduce the debtor’s interest rates or waive certain fees and to contribute a small percentage of the amount received to the counseling agency to help fund its expenses.

The FTC and others have noted that many credit counseling agencies operate honestly and fairly and that these agencies are professional operations that provide valuable services to financially distressed consumers. However, starting in the 1990s, consumer complaints about selected segments of the credit counseling industry spurred congressional hearings and federal and state investigations into the activities of many credit counseling agencies. For example, over the past few years, the FTC has settled enforcement actions against several of these agencies for alleged abusive practices, including steering consumers into debt management plans that provided financial benefits to the agency but not to the consumer. Further, as part of its Credit Counseling Compliance Project, IRS has undertaken a broad examination effort of credit counseling organizations for compliance with the Internal Revenue Code, including the propriety of the organizations’ tax-exempt status.9, 10 Between January 2005 and March 2007, IRS had revoked or terminated the federal tax-exempt status of 19 credit counseling agencies, and as of March 2007, IRS had proposed revocations for an additional 28 agencies.

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

The Bankruptcy Act requires prefiling credit counseling and debtor education providers to meet certain requirements designed to ensure the quality of their services and prevent abusive practices. The Trustee Program adopted application forms and an interim final rule on procedures for approving applicants. Few complaints have been raised about providers’ competence or integrity, although IRS is in the process of examining the tax-exempt status of four providers.

Agencies Must Meet Statutory and Trustee Program Requirements to Be Approved

Treasury Inspector General for Tax Administration, Abuses in the Tax-Exempt Credit Counseling Industry Are Being Addressed, but Further Actions Are Needed to Ensure Overall Industry Compliance, Reference Number: 2006-10-081 (Washington, D.C.: May 2006).

The Pension Protection Act of 2006 amended section 501 of the Internal Revenue Code to establish additional requirements that credit counseling organizations must satisfy in order to qualify for tax-exempt status under either section 501(c)(3) or section 501(c)(4). See Pub. L. No. 109-280, § 1220, 120 Stat. 780, 1086-89 (2006) (to be codified at 26 U.S.C. § 501(q)). For example, an organization is prohibited from making loans (other than interest- free loans) to debtors. The additional requirements will not apply to 501(c)(3) and 501(c)(4) organizations existing before the enactment of the Pension Protection Act until after August 17, 2007. An IRS official noted that the revocations of credit counseling agencies’ tax-exempt status were not related to changes made by the Pension Protection Act. have an independent board of directors with the majority of members not directly or indirectly benefiting financially from the outcome of the counseling services; charge a reasonable fee for counseling services; provide full disclosure to a client on certain prescribed items; provide for the safekeeping and payment of client funds, including auditing the trust accounts annually and bonding employees; provide trained counselors with adequate experience; and have adequate financial resources to provide continuing support services for budgeting plans over the life of any repayment plan.

The act required the Trustee Program to undertake a thorough review of the qualifications of a credit counseling agency before approving it to provide prefiling counseling services. Providers are initially approved for a probationary period not to exceed 6 months; at the conclusion of this period, they must reapply and the Trustee Program can approve them for an additional 1-year period. In July 2006, the Trustee Program adopted an interim final rule that set forth application procedures designed to ensure that only organizations that met the minimum qualification standards set forth in the Bankruptcy Act would be approved to provide services. The rule established criteria by which the Trustee Program will evaluate whether applicants have satisfied the statutory standards. For example, the rule specified factors that indicate whether an applicant will be providing counselors with adequate training and experience. The rule also established procedures permitting the Trustee Program to remove agencies from the approved list, including an administrative review process before removal.

As with credit counseling providers, the Bankruptcy Act also established minimum qualification standards for debtor education providers. For example, the act stated that these entities must provide personnel with adequate experience and training and use appropriate learning materials and teaching methodologies. The act also required that the provider have adequate facilities in reasonably convenient locations or, alternatively, provide instruction by telephone or through the Internet. Debtor education providers also must keep records to permit evaluation of a course’s effectiveness. The act does not require debtor education providers to be nonprofit entities. The Trustee Program’s interim final rule set forth application procedures and specified the certification standards for an agency’s instructors, established course procedures and recordkeeping requirements, and identified the topics that the courses must include.

The Trustee Program Developed an Approval Process Designed to Help Ensure Compliance with Statutory and Program Requirements

The Trustee Program established the Credit Counseling and Debtor Education Unit in June 2005 to implement the relevant provisions of the Bankruptcy Act, which went into effect in October 2005. Because the Trustee Program had no prior experience or expertise in this area, the unit sought input from a wide variety of stakeholders, including state and federal agencies, credit counseling representatives, consumer advocates, and academics. In June 2005, the unit developed application forms and procedures and a basic process for approving providers. A wide range of industry participants told us that the Trustee Program had generally been successful in setting up an infrastructure, establishing guidance and an application process, and approving providers within a very limited time frame.

Credit counseling agencies applying to become approved providers—or reapplying to maintain their status as providers—must provide the Trustee Program with a variety of information used to evaluate the agencies’ qualifications. Among the information that applicants are required to disclose is names and other data on current and former officers, directors, and trustees, including whether any have been convicted of certain crimes; data on the agency, including how long it has been in business, the number of clients it has served, and relevant licenses, accreditations, and association memberships; revocations of licenses or accreditations, legal actions and investigations, and disciplinary or enforcement actions; audited financial statements for the previous 2 years for applicants that offer debt management plans; nonprofit status, including any correspondence with IRS related to section 501(c)(3) tax-exempt status; information on the nature and content of the credit counseling services provided, such as the average length of a session; written materials, such as handouts and protocols, used in providing credit information on debt management plans serviced by the agency.

To understand and assess the Trustee Program’s process for reviewing applications for credit counseling and debtor education, we conducted a detailed review of the case files of 32 applications that had been approved and 11 applications that had been denied. Our case file review found that the Trustee Program’s process for reviewing applicants was generally systematic and thorough and designed to ensure that the applicants approved by the program met the qualification standards set forth in the Bankruptcy Act. In reviewing applications, analysts in the Counseling and Debtor Education Unit used a checklist to ensure that each applicant satisfied the statutory and application requirements and had provided documented evidence to show sufficient experience, qualifications, and proficiency. In many cases, applicants had to provide additional information. The Trustee Program also required some applicants to make modifications to their programs or processes before approving the application. For example, in several cases we reviewed, applicants were required to add additional material to the disclosure statements provided to clients. In another case, an Internet-based counseling provider was required to ensure that its counseling sessions added opportunities for direct interaction between the debtor and a counselor.

The Trustee Program’s review process also includes measures to evaluate the applicants’ character and standing in the credit counseling industry. For example, Trustee Program officials told us that they consult publicly available information, such as the Web site of the Better Business Bureau, and conduct an Internet search on applicants for information on their character and corroboration of information submitted. In addition, higher- risk applicants are evaluated more rigorously. For instance, agencies that enter a high proportion of clients into debt management plans may be asked to provide additional information on the number and nature of these plans. As of October 2006, the Trustee Program had rejected 96 applications to provide credit counseling or debtor education services. In most of the cases we reviewed where the applicant was rejected, it had not provided sufficient documentation to demonstrate its nonprofit status, the existence of an independent board of directors, or its ability to perform adequate counseling. In addition, as of October 2006, 123 applications were withdrawn before being approved or rejected. Thus, according to the Trustee Program, out of 680 original applications, 64 percent had been approved by the Trustee Program, 32 percent had been either rejected or withdrawn, and 4 percent were still in the process of being reviewed.

During the period between July 2005 and January 2007, approval of credit counseling and debtor education applications took an average of about 7 weeks from the time they were submitted, according to information provided by the Trustee Program. In some cases, the approval of an application can be lengthy—38 weeks in one instance—in part because applicants often are asked to provide additional information. Some providers we spoke with said they believed that the review process could have been more streamlined—for example, one provider told us it was asked to provide the same information twice. A Trustee Program official noted that the credit counseling and debtor education requirement was still relatively new and the program is continuing its efforts to streamline and improve the application process.

Trustee Program officials told us they are currently developing procedures for conducting audits of selected providers that have been approved for credit counseling or debtor education. These audits, known as Quality Service Reviews, are expected to include on-site inspections that will examine, among other things, the quality of providers’ services and compliance with statutory and program requirements.

Few Complaints Raised about Providers’ Competence or Integrity, although IRS Is Examining the Tax-Exempt Status of Four Providers

As of October 2006, the Trustee Program had approved 153 credit counseling providers. As required by statute, all of the credit counseling providers were nonprofit organizations, and about 94 percent of them had tax-exempt status under section 501(c)(3) of the Internal Revenue Code. While some of the approved agencies were relatively new organizations, about 90 percent had more than 5 years of experience conducting credit counseling. The three largest credit counseling providers—Consumer Credit Counseling Services of Greater Atlanta, GreenPath Debt Solutions, and Money Management International—represented more than half of all prefiling credit counseling certificates issued nationwide between January and October 2006. Many of the approved counseling agencies were members of the National Foundation for Credit Counseling, which industry participants told us is regarded as having high membership standards. In addition, many of these providers were accredited by the Council on Accreditation.

The Trustee Program had also approved 268 debtor education providers as of October 2006. Many of these providers also provided credit counseling services and the largest three provided almost half of all debtor education sessions nationwide. As of March 2006, about one-third of the debtor education providers had tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Several Chapter 13 trustees—individuals appointed by United States trustees to administer bankruptcy cases—were approved to provide debtor education, as were some educational institutions, such as community colleges.

Complaints Have Been Limited

As noted earlier, prior to the implementation of the Bankruptcy Act, concerns had been raised that debtors required to receive prefiling credit counseling could be exposed to unfair and deceptive practices by unscrupulous agencies. However, the great majority of representatives of consumer advocacy groups, federal agencies, industry participants, and other stakeholders we spoke with believed that the credit counseling agencies approved by the Trustee Program have been reputable. In addition, no federal or state law enforcement officials we spoke with identified any federal or state enforcement actions related to consumer protection issues against any providers subsequent to their approval.

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. Half of these complaints were made by bankruptcy attorneys, while about one-quarter were made by consumers and one-quarter by service providers, bankruptcy courts, and others. Our review of a selection of complaints found that the Trustee Program took action to assess and follow up on each complaint, including notifying the relevant provider and asking for a response to the allegation. Providers typically gave the Trustee Program a detailed reply and documentation related to the alleged complaint. For example, one provider offered information based on a tape recording of the counseling session in question.

Our analysis found that the many of the complaints were related to administrative issues, such as the timely issuance of a debtor’s certificate or the status of a provider’s license. In addition, 20 complaints alleged unfair or inappropriate practices by providers. These included cases where providers were accused of giving legal advice, discouraging customers from filing for bankruptcy, or failing to inform clients of the possibility of a fee waiver. In many cases, the provider offered evidence that satisfied the Trustee Program that the complaint was without merit. In a few cases, the provider acknowledged to the Trustee Program that the complaint had merit and responded accordingly—for example, refunding a fee to a client or implementing additional procedures to ensure staff compliance with relevant policies. In no case did a complaint result in the Trustee Program removing a provider from the approved list, according to a program official.

IRS Is Examining Four Providers Approved by the Trustee Program

As noted earlier, IRS has put credit counseling organizations under additional scrutiny in recent years. As part of its Credit Counseling Compliance Project, which began in October 2003, the agency began examinations of 63 credit counseling agencies, which at the time represented more than half of the industry’s revenue. The examinations focused on whether the agencies were charitable organizations meeting the requirements for tax exemption under section 501(c)(3) of the Internal Revenue Code. As of March 2007, IRS had completed examinations of 47 credit counseling agencies and in all cases the completed examinations resulted in either revocation, proposed revocation, or other termination of tax-exempt status. According to a May 15, 2006, IRS press release, the revocations occurred because these organizations did not provide the level of public benefit required to qualify for tax exemption. The agency stated that many of these agencies served primarily to get clients into debt management plans, offered little or no counseling or education, and appeared to be motivated mostly by profit. In many cases, IRS stated, these agencies also served the private interests of related for-profit businesses, officers, and directors.

No credit counseling provider approved by the Trustee Program had had its federal 501(c)(3) tax-exempt status revoked as of March 2007, according to publicly available documents we reviewed. However, IRS officials told us that four of the credit counseling agencies still under examination were agencies approved by the Trustee Program. A Trustee Program official told us that it was aware of these examinations at the time that it approved these applicants, but had determined that the four agencies met the statutory and program requirements despite the IRS scrutiny.

The Trustee Program can receive information about a provider’s tax status through several mechanisms. As part of its process of reviewing applications and reapplications, a Trustee Program official told us that the program consults publicly available information from IRS or the applicable state to confirm the applicant’s nonprofit status. As noted earlier, the program’s application forms also require that new applicants—as well as current providers seeking their annual reapproval—disclose any audit or investigation by IRS or other federal or state agency. In addition, the interim final rule requires that providers, once approved, promptly notify the Trustee Program of any circumstances that would materially change a response to any section of the application, which, according to a Trustee Program official, would include the initiation of an IRS investigation. The interim final rule also requires that providers notify the program immediately if IRS cancels or terminates their tax-exempt status. Applicants and providers are required to submit, upon request, a written waiver authorizing the Trustee Program to obtain confidential information about the agency from IRS. Program officials told us they have used such waivers in several cases to get information on whether a provider is under examination by IRS and the status of the examination process. The waiver also gives the program access to any proposed or final revocation letter from IRS to a provider.

A Trustee Program official told us that when the program learns that an applicant is under examination by IRS, the program obtains and reviews correspondence between the applicant and IRS in order to understand the basis for the examination. For example, the proposed revocation letter includes the reasons why IRS seeks to revoke the agency’s tax-exempt status. In addition, the Trustee Program official said that applications of agencies under IRS examination receive additional scrutiny related to their use of debt management plans and potential conflicts of interest. As noted earlier, a Trustee Program official told us the program had approved the four applicants under IRS examination because after careful review it was determined that the applicants met statutory and program requirements.

The official also noted that IRS may determine that a credit counseling agency is not tax exempt under section 501(c)(3) because it does not have an exclusively charitable or educational purpose, but such a finding would not necessarily preclude the applicant from meeting the statutory or program requirements for becoming an approved provider. Although the statute requires credit counseling providers to be nonprofit organizations, it does not require that they be tax exempt under section 501(c)(3). The interim final rule does allow the Trustee Program to immediately remove a credit counseling agency from the approved list if IRS revokes the agency’s tax-exempt status. A Trustee Program official told us that this provision was intended to protect consumers in cases where IRS’s revocation is based on conduct that raises questions about the integrity of the provider. A program official told us that should IRS revoke an agency’s tax-exempt status, the program would carefully review the reasons for the revocation and take whatever actions were appropriate.

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

According to the Bankruptcy Act, the prefiling credit counseling session should provide clients with individualized assessments and help them develop a plan to respond to their financial situation. The great majority of counseling is conducted by telephone or via the Internet rather than in person. We did not find evidence that counselors were providing biased information and few clients appear to be entering debt management plans. However, a wide range of observers questioned the value of the prefiling credit counseling requirement. It was intended to help consumers make informed choices about their options, but anecdotal evidence suggests that by the time most consumers receive the counseling, their financial problems are dire and they have few viable alternatives to bankruptcy. The Trustee Program does not track and monitor the outcomes of counseling sessions because it is not required to by statute, but such data would be useful in determining whether the counseling requirement is meeting its intended goal. Finally, the predischarge debtor education requirement—a general financial literacy course covering budgeting, money management, credit, and consumer protection—is believed by most observers we spoke with to be beneficial.

Credit Counseling Sessions Are Designed to Provide Debtors with Individualized Assessments

The Bankruptcy Act describes the required prefiling credit counseling as “an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outline the opportunities for available credit counseling and assist such individual in performing a related budget analysis.” The act requires that this session include an analysis of a client’s current financial condition and the factors that caused this condition and help develop a plan to respond to the client’s problems that would not involve incurring additional debt. The Trustee Program’s interim final rule indicated that counseling sessions should average 60 to 90 minutes in length and prohibited credit counselors from providing debtors with legal advice, unless otherwise authorized by law. The Trustee Program has not published additional formal guidance or instruction about the nature or content of the counseling session. Trustee Program officials told us that it was widely understood that the content of the prefiling counseling session would closely resemble the traditional sessions that reputable credit counseling agencies have provided for many years.

Our review of the Trustee Program’s case files and counseling materials of 15 credit counseling providers—representing more than two-thirds of certificates issued—showed that the content of the credit counseling sessions, as described in the written materials, was in accordance with the requirements of the Bankruptcy Act. In general, the different providers had similar curricula and materials, although some providers covered certain topics more thoroughly than others. For example, some providers included more detailed discussions of topics such as modifying spending habits, avoiding identity theft, or negotiating with creditors. Credit counseling sessions generally began with providers collecting data on the client’s finances, including sources and amount of income, debt, and expenses. In some cases, providers received some of this information from the client in advance via the Internet or from the client’s credit report. Individual counselors then typically analyzed the data with a software program and provided the client with a personalized budget. They discussed the client’s financial goals and potential opportunities for reducing spending and paying off debt. Counselors then described the client’s options—for example, developing a budget, entering into a debt management plan, or filing a Chapter 7 or Chapter 13 bankruptcy. Although counselors are prohibited from giving legal advice or recommending whether or not clients should file for bankruptcy, some providers describe the advantages and disadvantages of each alternative. When the session is over, the counselor issues a certificate verifying that the client has completed the prefiling credit counseling requirement.

Most Credit Counseling Is Conducted by Telephone or Internet

Although most providers offer clients the option of conducting credit counseling sessions in person, available data indicate the great majority of debtors fulfill their prefiling requirements by telephone or via the Internet. Trustee Program data collected on certificates issued between July 11 and October 17, 2006, indicated that 45 percent of all prefiling counseling sessions were conducted by telephone, 43 percent were conducted via the Internet, and 13 percent were conducted in person. Similarly, a survey by the National Foundation for Credit Counseling of its member agencies that conduct prefiling counseling found that between October 17, 2005, and August 31, 2006, 61 percent of their sessions were conducted by telephone, 24 percent via the Internet, and 15 percent in person.

Academic researchers, counseling providers, and other experts we spoke with said that although in-person counseling may have advantages, telephone counseling can be an effective method of delivery. While some providers noted that counseling conducted face-to-face can be beneficial when addressing more complex financial situations, other providers and industry participants noted that telephone counseling may allow clients more convenience and flexibility and may be easier for people with mobility problems, such as the elderly. A recent study by Georgetown University’s Credit Research Center found no significant difference in the outcomes of credit counseling sessions conducted by telephone or in person. Specifically, the study found that clients receiving in-person and telephone counseling had similar risks of bankruptcy or credit problems 2 years later. Our review of materials used to facilitate credit counseling sessions indicated that they generally had the same content and structure regardless of whether they were delivered in person, by phone, or via the Internet.

To receive prefiling credit counseling via the Internet, a client generally logs on to the provider’s Web site and inputs the same data on his or her finances that would be provided during a telephone or in-person session. On the basis of these data, the client is typically provided information and a financial analysis, including a description of the available alternatives. Trustee Program officials told us all approved Internet-based credit counseling sessions were required to include a separate component in which the client communicated individually with a counselor. Providers told us that after completing the Internet portion of the counseling session, the client could speak with a counselor by telephone or, in some cases, via Web chat. During these one-on-one communications, which one provider told us typically last 10 to 20 minutes, counselors reviewed the budget analysis with the client and answered any questions. The Trustee Program also requires providers to have procedures to effectively verify their clients’ identity. We did not identify any significant research on the effectiveness of credit counseling facilitated via the Internet. The Trustee Program told us that it has contracted with the RAND Corporation to review the comparative effectiveness of credit counseling delivered via telephone, Internet, and in person. A report from RAND is expected to be issued by July 2007.

Available Evidence Indicates That Prefiling Credit Counseling Results in Few Debt Management Plans

The Bankruptcy Act includes provisions designed to help ensure that credit counseling sessions provide objective information and present the client with alternatives in a neutral manner. For example, the act requires that counseling providers be nonprofit entities with independent boards of directors and prohibits counselors from receiving commissions or bonuses based on the outcomes of the counseling sessions. Despite these provisions, some consumer advocacy groups, policymakers, and others expressed concerns that credit counseling provided under the Bankruptcy Act might sometimes be biased and not in the clients’ best interests. Specifically, concerns existed that providers might inappropriately discourage clients from filing for bankruptcy and instead encourage them to enter into debt management plans that benefited the agency but not the debtor.

However, available evidence indicates that only a very small number of clients receiving prefiling credit counseling have entered into any debt management plan. Counseling providers and representatives of bankruptcy attorneys we spoke with generally estimated that fewer than 2 percent of prefiling credit counseling clients entered debt management plans. Further, a survey by the National Foundation for Credit Counseling of its member agencies indicated that about 3 percent of clients who signed up for prefiling counseling from October 2005 through August 2006 enrolled in a debt management plan. In general, representatives of consumer groups, panel trustees, and others told us that they had not observed cases in which clients receiving prefiling credit counseling had been inappropriately encouraged to enter debt management plans or avoid filing for bankruptcy. As of October 2006, the Trustee Program had received five formal complaints (out of more than 650,000 credit counseling certificates issued) alleging that providers made harmful or inappropriate recommendations. Our review of the documentation associated with these five complaints indicated that in each case the provider gave the Trustee Program a comprehensive response. In each of these five cases, the program was satisfied that either the complaint lacked merit or the provider had taken appropriate steps to remediate the problem.

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

The Conference Report accompanying the Bankruptcy Act indicated that the purpose of the credit counseling provisions was to ensure that consumers could “make an informed choice about bankruptcy, its alternatives, and consequences.” 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.

However, it is unclear whether the credit counseling requirement is achieving its intended purpose. While quality credit counseling can, in general, be beneficial, a wide range of observers we spoke with—including representatives of federal agencies, bankruptcy attorneys, and panel trustees; consumer advocates; and several counseling providers—told us that the timing of the counseling conducted to fulfill the requirement of the Bankruptcy Act could mitigate its value. The federal Financial Literacy and Education Commission noted in its national strategy that the use of reputable credit counseling could have a significant positive impact, making borrowers more creditworthy and decreasing their debt. But the strategy also recommended that consumers seek credit counseling services early, when financial problems start, to avoid potential bankruptcy. In practice, however, by the time individuals obtain prefiling credit counseling, they usually have already consulted with a bankruptcy attorney and have serious financial problems, such as imminent foreclosure of their homes. As such, anecdotal evidence indicates that the great majority of clients receiving prefiling counseling have few viable alternatives to bankruptcy. The Bankruptcy Act’s credit counseling requirement therefore may not be serving its purpose of helping consumers make informed choices about whether or not to file for bankruptcy. Providers and others told us that many clients perceived the counseling session as an administrative obstacle rather than a useful exercise.

Questions about the value of the prefiling requirement stem from a widespread belief among observers that nearly all of the consumers that receive the credit counseling subsequently file for bankruptcy. Yet the evidence for this is largely anecdotal, as comprehensive data do not currently exist on the outcomes of those consumers who receive prefiling credit counseling. Neither the Trustee Program, credit counseling providers, or any other party currently track how many consumers who receive credit counseling subsequently file for bankruptcy within the 180 days during which the certificates may be used. Similarly, little is known about the alternatives chosen by those consumers who do not file for bankruptcy or how the credit counseling affects their decisions.

During roughly the first half of 2006, some 381,005 counseling certificates were issued and 263,408 bankruptcy petitions filed. However, this information on its own does not provide a reliable estimate of how many consumers who received counseling subsequently filed for bankruptcy, for several reasons. First, in cases that involve a husband and wife filing a joint bankruptcy petition, each must obtain counseling and be issued a certificate. Second, a time lag may exist between the time the certificate is issued and the time of the filing, because the certificate is good for 180 days. For this reason, reported bankruptcy filings during a given time frame will not reflect all the bankruptcies that will be filed using the certificates issued in that time frame. Third, certificates are sometimes cancelled and reissued for administrative reasons (such as the misspelling of the client’s name), so that one person is issued two certificates. Finally, occasionally a client may receive prefiling credit counseling but not be issued a certificate—for example, if the client decides not to file for bankruptcy.

When a provider completes a prefiling credit counseling session, it uses a Web-based system operated by the Trustee Program to issue the client a certificate, which includes a unique certificate number. While the Trustee Program maintains a list of certificate numbers, for privacy purposes it does not receive any information, including names, about the clients who were issued certificates. A bankruptcy petitioner must provide to the court a certificate to document having satisfied the prefiling counseling requirement. However, the courts do not track or report the unique numbers assigned to these certificates. As a result, it is not possible to link individuals who have received prefiling credit counseling with individuals who have filed for bankruptcy.

A Trustee Program official told us that the program had not taken steps to track and monitor the outcomes of credit counseling sessions because this effort was not part of its statutory responsibilities. The Bankruptcy Act, he noted, requires the Trustee Program to test and evaluate the effectiveness of a pilot debtor education curriculum, but contains no analogous provisions for monitoring or evaluating credit counseling. As we have reported in the past, meaningful data on program outcomes and costs are essential for appropriate oversight and decision making. Without reliable data on the outcomes of the prefiling credit counseling sessions, policymakers and program managers lack information that would allow them to determine how well the statutory requirement is truly serving to inform consumers about their options.

Debtor Education Sessions Are Designed to Offer Financial Management Skills

The Bankruptcy Act describes the debtor education requirement as an “instructional course concerning personal financial management” that could be offered in person, by telephone, or via the Internet. The Trustee Program’s interim final rule specified that the course should average 2 hours in length and include written information and instruction on four major topics: budget development, which includes, calculating income, identifying and classifying monthly expenses, and setting short-term and long-term goals; money management, which includes keeping adequate financial records, developing decision-making skills to distinguish between wants and needs, comparison shopping, maintaining appropriate levels of insurance, and saving for emergencies; wise use of credit, which includes understanding the types, sources, and costs of credit and loans; identifying debt warning signs; using credit appropriately and identifying alternatives to credit; and checking a credit rating; consumer information, including public and nonprofit resources for consumer assistance and applicable consumer protection laws and regulations.

In reviewing the debtor education curricula, teaching guides, and other materials of 17 debtor education providers, we found that the content included the topics and elements that the Trustee Program required. In general, we found the curricula of different providers to be fairly similar, although some providers included additional details or emphasis on certain topics. According to a Trustee Program official, to cover the required topics, most of the debtor education providers used 1 of about 15 standard curricula—for example, the National Foundation for Credit Counseling’s “Live a Richer Life” or the Federal Deposit Insurance Corporation’s “Money Smart.”

The Bankruptcy Act required that the Trustee Program, after consulting with a wide range of experts in the field, also develop its own curriculum and training materials for debtor education. The act required the program to test the effectiveness of this curriculum and materials for 18 months in six judicial districts. In September 2005, the Trustee Program contracted with the Education Development Center, a nonprofit research firm, to develop the pilot curriculum and with Abt Associates, a private consulting firm, to evaluate it. The curriculum, entitled “Financial Education: Principles and Practices,” was presented by academic institutions in the six judicial districts selected for the pilot and was still being evaluated as of March 2007.

Trustee Program data collected on certificates issued between July 11 and October 17, 2006, indicated that 50 percent of predischarge education sessions was conducted by Internet, 29 percent was conducted via telephone, and 21 percent was conducted in person. In-person debtor education courses are typically conducted in a group classroom setting, while telephone sessions are conducted in one-on-one or group settings. For Internet sessions, the client generally reads the educational material and takes an on-line quiz, and then may have a follow-up discussion with an instructor. The Trustee Program does not require that debtor education conducted via the Internet include individual communication with a counselor, but a counselor must be made available to answer any questions clients may have.

Most representatives of consumer groups, panel trustees, bankruptcy attorneys, and others we spoke with believed that the predischarge debtor education course was likely to help improve consumers’ financial literacy. They noted, for example, that consumers completing bankruptcy should receive guidance on budgeting, avoiding future debt, and rebuilding credit. The National Association of Chapter 13 Trustees established a similar debtor education course several years before the Bankruptcy Act took effect. According to representatives of Chapter 13 trustees, these courses were particularly helpful for debtors under Chapter 13 bankruptcy protection, who operate under a repayment plan for up to 5 years, and debtors who took the course were more likely to successfully complete their repayment plans.

Provider Fees Are Generally Considered Reasonable, Although Fee Waiver Policies Vary

The Bankruptcy Act requires that providers charge reasonable fees and provide their services without regard to a client’s ability to pay. Neither the statute nor the Trustee Program’s interim final rule provide specific criteria for what constitutes a “reasonable fee” or “client’s ability to pay.” Available evidence indicates that credit counseling and debtor education sessions typically cost about $50 or less, an amount that representatives of consumer groups, legal organizations, and others we spoke with generally believed to be reasonable. Providers varied in their policies and practices for waiving fees. The Trustee Program has not issued rules or specific guidance on what constitutes a debtor’s ability to pay because it wanted to give providers the flexibility to respond to market conditions. However, formalized guidance could be beneficial because it could, among other things, set a minimum benchmark for reducing or waiving fees.

Providers Must Charge Reasonable Fees and Provide Services Regardless of Clients’ Ability to Pay

The Bankruptcy Act requires that credit counseling and debtor education providers charge reasonable fees for their services and provide these services without regard to the client’s ability to pay the fee. However, the statute did not specify what fees are considered “reasonable” nor what constitutes a client’s “ability to pay.” Before the Bankruptcy Act came into effect, the Trustee Program noted on its Web site that based on information provided by the industry, it believed that credit counseling would generally be available for a fee ranging from free to $50. The site also noted that a number of variables may affect an agency’s fee structure, including geography, types of services provided, administrative costs, and the presence of alternate funding sources. The Trustee Program said that in determining whether fees were reasonable, it would consider these factors as well as the fees customarily charged in the industry for similar services. The site did not provide information about the expected fees for debtor education.

In its interim final rule, adopted in July 2006, the Trustee Program did not provide specific guidance on what dollar amount would constitute a reasonable fee nor the criteria providers should use in determining a client’s ability to pay. A Trustee Program official told us that in addition to the program’s publicly available guidance, it has provided informal feedback to providers who have inquired about the appropriateness of their fee structures. The Trustee Program requires that providers disclose their fee schedules in their applications, and as of July 2006, has also required providers to disclose their policies for reducing or waiving fees based on the client’s ability to pay. The official told us that the program reviews providers’ waiver policies during the application process to ensure that the policies are clear and objective, and in some cases have rejected applicants for inadequate fee waiver policies. The interim final rule specified that providers must advise clients of their fee schedules before services are rendered and inform them that services are available for free or at a reduced rate based on their ability to pay. It also prohibited providers from charging a separate fee for issuing the counseling and education certificates.

While Providers’ Fees Are Considered Reasonable, Fee Waiver Policies Vary

The Trustee Program requires providers to report in their applications and reapplications the fees that they charge, although the program does not track these data centrally. Trustee Program staff, providers, and trade association representatives told us that most providers charge around $50 each for their credit counseling and debtor education sessions. This estimate was corroborated in survey data collected by the National Foundation for Credit Counseling from 107 providers, which reported charging an average fee of $47 for prefiling credit counseling and $43 for debtor education. In addition, each of the three largest providers, which as of October 2006 had issued about half of all certificates, told us that they charged exactly $50 for an individual credit counseling or debtor education session. Among the smaller credit counseling providers we spoke with, two told us that they charged $50, and the others charged $49, $35, and $0. Among debtor education providers we spoke with, fees ranged between $0 and $50 per individual session. In a few cases, we identified smaller counseling and education providers whose fees were higher, such as $75 per session. Representatives of consumer groups and legal organizations, as well as academics and others we spoke with, generally said they believed that the fees charged by credit counseling and debtor education providers had been reasonable. Some providers said that the fees had generally been adequate to cover their costs, but others said that prefiling counseling was being subsidized by their other lines of business. Providers noted that the requirements were still relatively new and that as the true cost of providing these services in the long term became clearer, they might consider adjusting their fees.

Providers have varying policies for determining a client’s ability to pay the fee. In September 2005, the National Foundation for Credit Counseling, after consulting with the Trustee Program, told its members that the program said it would be appropriate to waive counseling fees for clients with incomes less than 150 percent of the poverty line—the same eligibility threshold authorized by federal law for waiving the fees charged by the court for filing a bankruptcy petition. Some providers we interviewed used as their threshold a different percentage of the poverty line or other criteria, such as whether the client received legal aid or disability benefits. The three largest providers all use differing criteria— one told us it waived fees for clients at or below 150 percent of the poverty line, a second for clients at or below 120 percent of the poverty line, and a third based on whether the client received free legal aid or had disability income. Providers we spoke with generally said that they allowed counselors to use their discretion to waive fees in additional circumstances as well. According to Trustee Program data, the three largest providers waived their fees 4 percent, 15 percent, and 26 percent of the time for credit counseling sessions, and 6 percent, 21 percent, and 34 percent of the time for debtor education courses. A Trustee Program official told us that three factors were responsible for the differences in the proportions of clients whose fees were reported waived. First, providers had different policies for determining ability to pay. Second, some providers chose to waive fees for some clients who did not qualify under the provider’s formal policy. Third, providers were inconsistent in how they reported fee waiver data to the Trustee Program—for example, some providers counted as waivers cases in which clients were charged the fee but failed to pay.

Some policymakers and consumer groups have expressed concerns that providers might not always clearly inform clients that fees could be waived for those unable to pay. Stakeholders involved in the process told us that there had been limited anecdotal evidence to support this concern. In addition, out of more than 930,000 credit counseling or debtor education certificates issued as of October 2006, the Trustee Program had received only seven formal complaints about providers that had not waived fees or told clients about this option. Trustee Program officials noted that nearly all complaints related to fees and fee waivers were made shortly after the Bankruptcy Act went into effect and the requirements were new.

Trustee Program Has Not Issued Formal Guidance on Determining a Client’s Ability to Pay

As noted earlier, neither the statute nor the Trustee Program’s rulemaking provide criteria for what constitutes a client’s ability to pay the fee for a counseling or education session. Some providers told us that the lack of guidance left them unsure about the criteria they should use. Eight of the 22 comments to the interim final rule submitted by providers, industry associations, and consumer groups requested that the Trustee Program provide guidance or clarification on what constitutes a client’s ability to pay. In some cases, the comments suggested that the program provide objective measures or uniform criteria. Several providers we spoke with, as well as trade associations, consumer groups, and creditor organizations, also told us that additional guidance on determining ability to pay would be beneficial.

Trustee Program officials told us that they are considering formalizing criteria, in a rulemaking, that providers should use to determine clients’ ability to pay but that they have not made a final decision on the issue. Program officials told us that they were reluctant to formalize such criteria because they did not want to be too prescriptive and wanted to give providers flexibility to respond to market conditions—for example, to adjust fee waiver policies based on local economic conditions and costs of doing business. However, clearer guidance on determining a client’s ability to pay could have several benefits. First, it could reduce uncertainty among providers as to what criteria are appropriate. Second, it could improve transparency by clarifying the minimum standards for waiving or reducing fees. Finally, it could help ensure that services are offered to clients regardless of ability to pay by providing guidelines for a minimum benchmark on when fees should be reduced or waived.

Supply of Providers Appears Sufficient and Actions Under Way Address Challenges Some Consumers May Face Fulfilling the Requirements

Evidence showed that as of October 2006, enough prefiling credit counseling and predischarge debtor education providers—153 and 268, respectively—had been approved to allow consumers to receive these services on a timely basis. Although in-person counseling or education is not easily accessible in some parts of the country, these services are available via telephone or Internet, and most debtors favored these options. Many providers offer services in several languages or provide translation services. Anecdotal evidence suggests that consumers who try to file for bankruptcy without an attorney sometimes are not aware of the credit counseling requirement. A survey of federal bankruptcy judges conducted by the Federal Judicial Center indicated that debtors who file for bankruptcy without fulfilling the credit counseling requirement can face a variety of consequences.

Enough Counseling and Education Services Exist to Meet Demand

Before the Bankruptcy Act went into effect, some members of Congress, consumer advocates, and others worried that not enough counseling services would be available within the required time frame for people filing for bankruptcy. Our review of the limited data available and anecdotal evidence indicated that as of October 2006 the supply of credit counseling and debtor education services had been adequate to meet the demand for these services. A wide range of participants in the bankruptcy process—including bankruptcy attorneys, panel trustees, a bankruptcy court representative, and service providers—told us that getting access to these services in a timely manner had generally not been a barrier to filing or receiving discharge of debts.

When the Bankruptcy Act went into effect in October 2005, the Trustee Program had approved 71 credit counseling and 76 debtor education providers. As of October 2006, this number had risen to 153 credit counseling and 268 debtor education providers. The three largest organizations provide about 56 percent of the credit counseling sessions and about 46 percent of the debtor education sessions. While the majority of providers are local organizations offering services in particular communities, about a dozen offer services nationwide, either through a network of field offices or through telephone or Internet services. Because the great majority of debtors fulfill the credit counseling and debtor education requirements through sessions provided by telephone or via the Internet, having providers nearby is not always necessary.

A wide range of participants we spoke with told us that consumers who call to schedule a credit counseling or debtor education session can usually be accommodated within 24 hours, and sometimes much sooner. Providers sometimes refer potential clients to another provider if they cannot see a client in a timely manner. The providers we spoke with, which represented the great majority of certificates issued, told us that they currently had adequate capacity to meet demand for their bankruptcy-related services. At the same time, the volume of bankruptcy filings has been relatively low since the Bankruptcy Act became effective and the capacity of providers could potentially become an issue should bankruptcy filings substantially increase in the future. However, several large providers told us they would be able to expand their capacity if needed.

In-Person Counseling Is Not Always Available, but Few Seek It

Nearly all approved credit counseling and debtor education providers offer their clients the option of in-person sessions. As of July 2006, consumers could receive prefiling credit counseling in person at more than 700 locations and debtor education in person at more than 1,000 locations. Comprehensive data do not exist on the precise proportion of consumers living close enough to agencies providing in-person counseling or education to comfortably travel to such a site. However, an analysis of existing data suggests that in-person counseling and education sessions are accessible to most of those who need them—particularly in metropolitan areas—but are not easily accessible in certain portions of the country. For example, judicial districts had, on average, 8 locations where consumers could fulfill the credit counseling requirement and 11 where they could meet the debtor education requirement via an in-person session. But some large judicial districts, such as those in Alaska, North Dakota, and Wyoming, had 5 or fewer such locations. No in-person locations existed for credit counseling in the district encompassing Southern Illinois, nor was in-person debtor education available in the District of Columbia.

Some providers we spoke with said that they had not expected that there would be so little demand for in-person prefiling credit counseling and predischarge debtor education services, pointing out that, by contrast, more than half of their traditional credit counseling sessions were conducted in person. Because of the low demand for in-person prefiling counseling, one large provider told us that it had reallocated some of its resources—for example, by closing some local offices and expanding call centers that provide telephone counseling.

Among participants in the process with whom we spoke, the consensus was that debtors sought to conduct the counseling and education sessions by telephone or Internet because these were the quickest and most convenient methods for satisfying the statutory requirements. As noted earlier, by the time most debtors receive the counseling, they have already consulted an attorney and decided to seek bankruptcy protection and see the counseling and education sessions largely as administrative obstacles to be overcome as quickly as possible.

Although relatively few debtors appear to seek in-person services, some consumer advocates and others have said that debtors in all parts of the country should at least have the option of obtaining services in person. These parties have noted that while some debtors may find telephone counseling more convenient, others may find in-person services a more comfortable and effective option. The Trustee Program’s Web site includes information about providers that offer in-person sessions and the locations for these sessions.

Steps Under Way to Address Challenges of Certain Populations in Accessing Services

Some potential bankruptcy filers, such as those who do not speak English, have limited literacy skills, or are not represented by an attorney, may face certain challenges in accessing prefiling credit counseling and predischarge debtor education. The Trustee Program and the courts have certain actions planned or under way to help address these challenges.

Non-English Speakers

As of October 2006, many credit counseling and debtor education providers offered their services in Spanish, and several offered services in other languages. For example, two large nationwide providers can conduct sessions in at least 15 languages and, using a translation services contractor, can provide sessions in about 150 languages. Because these providers offer telephone counseling and have been approved to provide counseling and education in almost all judicial districts, their services are accessible to debtors nationwide. Some smaller local providers also offer in-person and telephone services in languages other than English—for example, a provider serving a region with large Chinese and Korean populations told us that it offered services in those languages. Providers that cannot offer services in a client’s primary language may refer the client to a provider that can. In some cases, counseling or education sessions are translated for the debtor by a friend or family member, although representatives who advocate for language access issues told us that this method is not fully effective. In addition, some providers offer written materials in Spanish but not in other foreign languages. As a result, debtors whose primary language is other than English or Spanish will receive information orally, but may not benefit from supplementary written materials.

Consumer and language access advocates, as well as representatives of bankruptcy attorneys, told us they were concerned about the ability of some non-English speakers to receive counseling and education services in their native languages in a timely and effective manner. One advocate noted that translation of these sessions may not always be effective given the technical nature of some of the financial terms used and the sensitive nature of the topics under discussion. These concerns were highlighted in a March 2006 decision in the Southern District of Florida, where a bankruptcy judge waived the prefiling credit counseling requirement for a man who said he was unable to find a provider that could offer him counseling in Creole. However, although comprehensive data do not exist, most providers told us that demand for sessions in languages other than English and Spanish has been low. For example, one large nationwide provider estimated that less than one-half of 1 percent of its clients require the use of its telephone-based translation services contractor. This provider also told us it had not had any requests for in-person counseling in languages other than English or Spanish.

When the Bankruptcy Act went into effect in October 2005, the Trustee Program’s Web site did not include any information on which foreign languages individual providers offered. In April 2006, the Trustee Program modified its Web site to include foreign languages offered by providers. The Trustee Program surveyed all providers in November 2006 to gather additional information on their available languages and translation services. As of January 2007, the Web site allowed users to conduct a search to identify providers offering services in any one of 29 languages. A program official told us that he expected that eventually the Web site will include a function that will allow consumers to search, by provider and location, for all languages and translation services offered.

Individuals With Special Needs or Circumstances

Apart from non-English speakers, certain other populations may have experienced challenges in accessing counseling and education sessions. For example, it may be difficult for individuals with limited literacy skills to understand counseling and education sessions, which often rely heavily on written materials. In such cases, some providers told us that during the session they read aloud most of the written materials. Some consumer advocates and representatives of bankruptcy attorneys have also expressed concerns about the ability of disabled, elderly, or incarcerated debtors to easily access credit counseling and debtor education in an effective and timely manner. We could not find any data on the nature of and extent to which such difficulties exist. Most participants in the bankruptcy credit counseling process that we spoke with said that while there may be individual examples in which debtors with special needs faced challenges accessing needed services, it did not appear that this was an issue for a large number of debtors.

Debtors Without Attorneys Also Can Face Challenges

Debtors filing for bankruptcy protection may use an attorney or may file without one (pro se). The proportion of debtors filing pro se varies across different judicial districts. For example, among seven bankruptcy courts that the Administrative Office of the U.S. Courts surveyed at our request, as few as 4.5 percent and as many as 24.9 percent of debtors filed pro se. At the initial meeting with a client, a bankruptcy attorney will typically tell the client about the credit counseling requirement. The attorney will often give the client contact information for approved counseling agencies and may provide a room with a telephone so that clients can fulfill the counseling requirement on the spot.

Debtors who file without the aid of an attorney can learn of the prefiling credit counseling requirement through other sources, such as instructional information located on the form of the voluntary petition that must be filed by the debtor, in other written materials provided by the bankruptcy court, or on the Web sites of the bankruptcy courts or the Trustee Program. Each of the 94 federal judicial districts has its own methods of disseminating explanatory information. When we telephoned bankruptcy courts in seven judicial districts to inquire about the process for filing for bankruptcy, staff typically directed us to the court’s Web site. A review of nine courts’ Web sites found that all but one highlighted the prefiling counseling requirement in a relatively prominent fashion, such as noting it on their home page. In one case, the requirement was not prominently noted, but instead was included among a long list of public notices.

The bankruptcy courts in all districts use a uniform set of Official Bankruptcy Forms that individuals must complete to file and take action in bankruptcy cases. In June 2006, at the suggestion of the Trustee Program, the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States modified the main form for filing a bankruptcy petition to make the prefiling counseling requirement more clear and conspicuous. The form now requires that petitioners attach an additional exhibit—Individual Debtor’s Statement of Compliance With Credit Counseling Requirement—to attest to compliance with the requirement or claim an exigent circumstance.

Debtors who file for bankruptcy without fulfilling the credit counseling requirement can face a variety of consequences. A survey conducted by the Federal Judicial Center asked U.S. bankruptcy judges what procedures they follow when a debtor has not produced a prefiling credit counseling certificate. When asked in the survey to select one or more, 44 percent of judges said they had given such filers a specified period to produce the certificate, 34 percent had issued an Order to Show Cause or otherwise set a hearing on the deficiency, 20 percent had taken no action, and 13 percent had dismissed the case. The survey also showed that 35 percent of the judges said they treated imminent foreclosure or eviction, by itself, as an exigent circumstance, while about 55 percent treated this as an exigent circumstance only if the debtors could satisfactorily explain why they had not yet received credit counseling. Another 10 percent said that imminent foreclosure or eviction was never an exigent circumstance.

Before the Bankruptcy Act went into effect, some policymakers, consumer advocates, and others expressed concern that the credit counseling requirement could create hardship for some debtors by delaying their ability to file a bankruptcy petition and receive the automatic stay that prohibits creditors from continuing to seek payment. This stay can be very important to some debtors—for example, those facing foreclosure on their homes. However, we did not identify data on the extent to which failure to receive credit counseling has created such hardships.

Conclusions

Within a limited time frame, the Trustee Program established policies and procedures for selecting credit counseling and debtor education providers, and thus far relatively few concerns have been raised about the competence of approved providers. We found that the program’s process for reviewing credit counseling applicants was generally comprehensive and included numerous steps designed to assess applicants’ proficiency and reputability. The Trustee Program said it is carefully monitoring the circumstances of the IRS examinations of four approved providers and will take appropriate actions based on the outcomes of these examinations—which we agree is essential given that IRS’s past examinations have often revealed abusive practices.

We also found that the value of the prefiling credit counseling requirement is not clear. The requirement was intended to provide consumers with information about bankruptcy and its alternatives so they can make informed decisions about their options. In practice, however, anecdotal evidence strongly suggests that most consumers have no realistic alternative to bankruptcy by the time they receive the counseling. As such, a wide range of stakeholders view the prefiling counseling requirement as an administrative obstacle rather than a useful exercise. It is therefore uncertain whether the requirement is achieving its key goal of helping consumers determine whether or not to file for bankruptcy. Better data on the outcomes of prefiling credit counseling would help program managers and policymakers determine its value. In particular, it would be useful to confirm whether, as many believe, nearly all consumers who receive prefiling counseling subsequently file for bankruptcy. The Trustee Program does not currently collect this information because doing so is not part of its explicit statutory responsibilities. In addition, there is currently no mechanism in place to match individual counseling certificates with bankruptcy filings. However, appropriate data on outcomes are essential to understanding program benefits and costs and to effective oversight and decision making. Data on how often counseling sessions result in bankruptcy filings or other outcomes would help determine how well the prefiling credit counseling requirement is serving its intended purpose.

There is less debate about the predischarge debtor education requirement, which provides broad-based financial education to debtors near the end of the bankruptcy process. This requirement is consistent with the increased attention being paid by Congress and executive branch agencies in recent years to improving Americans’ financial literacy. As we have noted in earlier reports, we believe that ensuring that Americans have the knowledge and skills to manage their money wisely is a key element in improving the economic health of our nation in current and future generations. Financial education efforts that seek to achieve goals such as reducing Americans’ debt are key to helping improve our citizens’ economic security and our country’s economic growth.

The fees charged for credit counseling and debtor education services generally appear to be reasonable. However, the extent to which fees are waived varies considerably among providers. The Trustee Program has not issued rules or formal guidance for what constitutes a debtor’s “ability to pay” because it wants to give providers flexibility to respond to market conditions. While we understand the program’s reluctance to be too prescriptive, we also believe that clearer guidance on criteria for reducing or waiving fees would have several benefits, including reducing uncertainty among providers about appropriate criteria, providing greater transparency on waiver policies, and ensuring compliance with minimum standards for waiving fees among all providers. At the same time, this guidance should give providers some flexibility, so as not to discourage those who may wish to waive fees more liberally than required.

The supply of credit counseling and debtor education providers appears to be sufficient to allow consumers to access these services in a timely manner. While in-person services are not always available in some locations, this concern is somewhat mitigated by the fact that the great majority of clients appear to prefer telephone or Internet counseling. Accessing services in languages other than English or Spanish has been a challenge for some consumers, however. The Trustee Program’s recent efforts to better communicate providers’ language and translation services represent positive actions in facilitating access by speakers of foreign languages. Further, the courts’ recent steps to better ensure that filers are aware of the prefiling counseling requirement are beneficial given the potential consequences of filing for bankruptcy without the required counseling certificate.

Recommendations

We recommend that the Attorney General direct the Director of the Executive Office for U.S. Trustees to do the following: To help assess the merit of the Bankruptcy Act’s prefiling counseling requirement, the Trustee Program should develop a mechanism that would allow the program or other parties to track the outcomes of prefiling credit counseling, including the number of individuals issued counseling certificates who then file for bankruptcy. This may involve working in conjunction with the Administrative Office of the U.S. Courts to ensure that the unique certificate numbers issued by the Trustee Program can be linked to bankruptcy petitions filed with the courts.

To clarify the Bankruptcy Act’s requirement that prefiling credit counseling and predischarge debtor education be provided regardless of a client’s ability to pay, the Trustee Program should issue formal guidance on what constitutes “ability to pay.” In developing this guidance, the program should examine the reasons behind the significant variation among providers in waiving fees. In addition, while this guidance should set a minimum benchmark for when fees should be reduced or waived, it should be designed so as not to limit or discourage providers who may wish to waive fees for more clients than qualify under the minimum benchmark.

Agency Comments

We provided a draft of this report to the Administrative Office of the U.S. Courts, Department of Justice, and IRS for comment. These agencies provided technical comments that we incorporated as appropriate. In addition, on behalf of the Department of Justice, the Executive Office for United States Trustees provided a written response, which is reprinted in appendix III.

In its comment letter, the Trustee Program said that it concurred with our recommendation to develop a mechanism that would allow the program or other parties to track the outcomes of prefiling credit counseling. The program noted that it already collects certain outcome data from providers through mechanisms such as its reapplication process and quality service reviews. It said it plans to refine and expand its current tracking and data collection methods and explore the feasibility of developing more comprehensive outcome measures. The Trustee Program also concurred with our recommendation related to issuing formal guidance on what constitutes ability to pay. The program said that it will promulgate formal fee waiver guidance in a rulemaking later this year and will study the fee waiver variations among approved providers.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies of this report to the Director of the Administrative Office of the U.S. Courts, the Attorney General, the Commissioner of Internal Revenue, and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staffs have any questions concerning this report, please contact me at (202) 512-8678 or jonesy@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV.

Appendix I: Scope and Methodology

Our report objectives were to examine (1) the actions taken by the Trustee Program to approve credit counseling and debtor education providers; (2) the content and results of the counseling and education sessions; (3) the fees providers charge for counseling and education services, and the extent to which these services are provided regardless of debtors’ ability to pay; and (4) the availability of approved counseling and education services, and the challenges debtors may face in receiving these services.

To address all of the objectives, we reviewed the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Act) related to credit counseling and debtor education and examined its legislative history. We also reviewed the July 2006 interim final rule on application procedures and criteria for approval of credit counseling and debtor education agencies, and we obtained and reviewed the public comments on this rule received by the Department of Justice’s Trustee Program. We also interviewed representatives of, and obtained relevant documentation from, the Trustee Program’s Credit Counseling and Debtor Education Unit, as well as the Federal Trade Commission, Internal Revenue Service (IRS), Administrative Office of the United States Courts, and the National Association of Attorneys General, including representatives from four states. In addition, we interviewed and collected documents from the American Bankruptcy Institute; National Association of Consumer Bankruptcy Attorneys; National Association of Bankruptcy Trustees; National Association of Chapter 13 Trustees; creditor organizations, such as the American Bankers Association and the Financial Services Roundtable; academic researchers; and consumer organizations, such as the Consumer Federation of America and the National Consumer Law Center. We also reviewed and analyzed data from the Trustee Program on complaints received related to credit counseling and debtor education providers, and the resolution of these complaints.

Further, we conducted comprehensive interviews with representatives of 10 providers of credit counseling or debtor education that had been approved by the Trustee Program. Seven of these providers had been approved to offer both of these services, while one offered only credit counseling and two offered only debtor education. These providers were selected because they included the three largest providers of each service and represented a range of different sizes, modes of delivery (in-person, telephone, and Internet), geographic locations, trade association affiliations, types of organizations, and years of experience. These 10 providers represented 62 percent and 53 percent of all prefiling credit counseling and predischarge debtor education certificates, respectively, that were issued from January 9, 2006, through October 17, 2006. We obtained from nearly all of them materials used to facilitate sessions, such as counselor training manuals, curricula, disclosures, workbooks, and handouts. In addition, we interviewed representatives of two trade organizations representing credit counseling agencies, the National Foundation for Credit Counseling, and the Association of Independent Consumer Credit Counseling Agencies.

To address all of the objectives, we also reviewed a nonprobability sample of the Trustee Program’s case files for 32 provider applications that were approved and 11 applications that were rejected. Among the approved applications we reviewed, 15 were for credit counseling and 17 were for debtor education; as of October 2006, the Trustee Program had approved 153 credit counseling providers and 268 debtor education providers. Among the rejected applications we reviewed, 6 were for credit counseling and 5 were for debtor education; as of October 2006, the Trustee Program had rejected 96 applications. We did not do a probability sample because of the limited size of the sample we could review and because we wanted to ensure that the small sample included all of the largest providers and specific numbers of other types of providers. The criteria we used to select the provider application files included (1) size of the provider, as measured by number of clients served 12 months prior to applying for Trustee Program approval, (2) delivery mode (in-person, telephone, and Internet), (3) type of organization (such as nonprofit agency, educational institution, or Chapter 13 panel trustee), (4) length of time in business, (5) trade association affiliation, and (6) geographic location. The providers represented in our file review had issued 77 and 67 percent, respectively, of all credit counseling and debtor education certificates issued from January 9 through October 17, 2006.

The case files we reviewed included, among other things, agencies’ initial applications, protocols, curricula and other guidance used by counselors and instructors, written materials and disclosures provided to consumers, fee schedules, and correspondence between the provider and the Trustee Program. To facilitate the case file review, we developed a data collection instrument to record specific information for each case file reviewed. To protect the confidentiality of agencies whose applications were approved or rejected, we did not record in our notes or include in our workpapers any identifying information from these file reviews (such as agencies’ and individuals’ names). Instead, we used unique numeric codes to track, for the purposes of our analysis, the information associated with individual applicants. We conducted our review on site at the offices of the Executive Office for U.S. Trustees.

To address the first objective, in addition to the steps described above, we reviewed and analyzed the Trustee Program’s written policies, rules, guidance, and procedures for approving credit counseling and debtor education providers, including the initial and revised applications and instructions. To determine whether IRS had revoked the section 501(c)(3) tax-exempt status under the Internal Revenue Code, or taken other enforcement actions against providers, we met with IRS officials and reviewed their publicly available information. To determine if providers had been subject to other enforcement actions, we met with representatives of the Federal Trade Commission and selected state investigative agencies. We also met with the Council of Better Business Bureaus and obtained Better Business Bureau reports for a selection of offices of the three largest providers.

To address the second objective, we reviewed and analyzed the materials used by our sample of providers to facilitate in-person, telephone, and Internet counseling and debtor education. For context, we observed a credit counseling session conducted in person (for which the provider obtained the client’s consent) and listened to a recording of a counseling session conducted by telephone (which did not allow identification of the client). We also observed two debtor education sessions conducted by telephone—one live and one recorded—which did not include the clients’ identities. We also participated, with the provider’s consent, in three mock credit counseling sessions conducted via the Internet.

To address the third objective, we reviewed guidance provided by the Trustee Program on its Web site related to fees and fee waivers. We reviewed and analyzed data maintained by the Trustee Program related to providers’ fees, but we determined that these data were not reliable. As a result, to learn providers’ fees and waiver policies, we relied largely on testimonial evidence from 10 providers we interviewed. In some cases, we also reviewed fee information supplied by providers on their Web sites. We also reviewed a study by the National Foundation for Credit Counseling that included information on its members’ fees for prefiling counseling and debtor education sessions.

To address the fourth objective, we reviewed available data from the Trustee Program on the number and characteristics of providers and analyzed the number and geographic distribution of providers. We also reviewed the Trustee Program’s Web site, which serves as its primary mechanism for supplying information on which providers have been approved by the program. We also reviewed a survey of bankruptcy judges that was conducted by the Federal Judicial Center in March 2006. Further, at our request, the Administrative Office of the U.S. Courts gathered information from the bankruptcy courts in seven judicial districts related to how the court handles debtors who fail to submit prefiling credit counseling certificates with their bankruptcy petitions. To better understand the experience of pro se debtors, we also telephoned bankruptcy courts in seven judicial districts to inquire about the steps needed for a bankruptcy filing and reviewed the information and instructions on Web sites of nine bankruptcy courts. We also reviewed relevant portions of the Federal Rules of Bankruptcy Procedure, including the standardized forms, attachments, and supporting instructions required by the courts to file a bankruptcy petition. In addition, we reviewed certain decisions issued by bankruptcy court judges regarding the failures of bankruptcy filers to fulfill the credit counseling requirement. To gather additional information on issues related to language, we met with a representative of an organization that advocates for improved language access and analyzed the Trustee Program Web site for the ease with which consumers can identify providers offering services in foreign languages.

To understand the implementation of the credit counseling and debtor education provisions in the six judicial districts in Alabama and North Carolina, we interviewed staff at the Administrative Office of the U.S. Courts and two bankruptcy administrators, one in Alabama and one in North Carolina. We also reviewed provider applications promulgated by the judicial districts in these two states, as well as the lists maintained by the six judicial districts of providers that have been approved. As part of our case file review, we also reviewed materials from some credit counseling and debtor education providers that had been approved in one or more of these six districts.

We conducted our review from February 2006 through March 2007 in accordance with generally accepted government auditing standards.

Appendix II: Implementation of Counseling and Education Provisions in Alabama and North Carolina

As a result of legislation passed by Congress in 1986, the administration of bankruptcy cases in Alabama and North Carolina is overseen by bankruptcy administrators rather than the Trustee Program. In the six judicial districts in these states, a bankruptcy administrator, under the Administrative Office of the U.S. Courts, is responsible for supervising the administration of bankruptcy cases, including maintaining panels of private bankruptcy trustees who liquidate debtors’ assets and monitor repayment plans. These administrators are also responsible for implementing the Bankruptcy Act’s credit counseling and debtor education provisions. To gather information on this implementation in these two states, we spoke with two bankruptcy administrators, one in Alabama and one in North Carolina, and an official of the Administrative Office of the U.S. Courts.

Bankruptcy administrators in Alabama and North Carolina told us they have largely mirrored the requirements, guidance, and practices established by the Trustee Program for approving credit counseling and debtor education providers. They use a slightly modified version of the Trustee Program’s instructions and application forms, and follow a similar process for reviewing applications. Unlike the Trustee Program, the bankruptcy administrators do not require applicants and providers to submit a written waiver authorizing access to confidential information about the agency from IRS, although the administrators are currently considering such a measure.

The six judicial districts in Alabama and North Carolina had approved between 9 and 14 credit counseling providers and between 10 and 14 debtor education providers, according to information given on these districts’ Web sites as of January 2007. Many of these providers had also been approved by the Trustee Program to offer services in other judicial districts, but a few were small, local organizations that were approved only in one district. None of the providers approved in these two states had had its tax-exempt status revoked by IRS. However, an IRS official confirmed that IRS is examining the tax-exempt status of two credit counseling agencies approved by bankruptcy administrators in Alabama and North Carolina. The Administrative Office of the U.S. Courts told us if a provider’s tax-exempt status were to be revoked, that provider’s approval to provide prefiling credit counseling could be reexamined. In addition, a Trustee Program official told us that one provider approved in Alabama or North Carolina had applied but been denied approval by the Trustee Program because, among other things, its counseling was not found to be adequate and its board of directors was not found to be sufficiently independent.

In general, the course content and mode of delivery for credit counseling and debtor education providers in Alabama and North Carolina were similar to those in other judicial districts. We found only two notable differences. First, the Trustee Program requires that approved Internet- based credit counseling sessions include a separate component in which the client has individual communication with a counselor, such as a telephone conversation or Web-based chat. However, administrators in Alabama and North Carolina told us their approved credit counseling sessions may be conducted entirely via the Internet without any direct interaction between the debtor and a counselor. Second, the fees charged by providers for credit counseling and debtor education sessions were typically $25 to $40, according to the administrators, as compared with an average of roughly $50 in the rest of the nation.

Appendix III: Comments from the Department of Justice

Appendix IV: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact named above, Jason Bromberg, Assistant Director; Gwenetta Blackwell-Greer; Anne A. Cangi; Emily R. Chalmers; Alexandra K. Dew; Melissa J. Jaynes; Carl M. Ramirez; and Omyra Ramsingh made key contributions to this report.