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Note: On April 24, 2007, the Government Accountability Office (GAO) issued a report on its study of the implementation of the credit counseling and debtor education requirements under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, including the approval process for providers.
Click here to read the full text of the report, which includes the U.S. Trustee Program’s comments to the GAO on the report.
This is a summarized version of this GAO report to Congress and the United States Trustee's comments about the effectiveness of the new bankruptcy law.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Act) amended the federal bankruptcy code to require
According to the legislative history of the act, one of the goals of the prefiling counseling requirement, which became effective on October 17, 2005, is to ensure that consumers understand the options available to them and the consequences of filing for bankruptcy. However, the requirement raised a number of concerns. In recent years, congressional committees and federal agencies have investigated some credit counseling agencies for alleged unfair and deceptive practices and were concerned that these practices, which included steering clients into repayment plans that benefited creditors and counseling agencies but not necessarily debtors, would affect those filing for bankruptcy protection. In addition, some members of Congress and other parties have been concerned that the cost and availability of counseling and education services could serve as barriers to those seeking to file for bankruptcy. In response to these concerns, Congress included in the Bankruptcy Act requirements for providers of both credit counseling and debtor education courses. The providers must meet certain criteria and obtain approval from the Department of Justice’s U.S. Trustee Program (the Trustee Program), which oversees the bankruptcy process for most federal judicial districts and acts to ensure compliance with applicable laws and procedures
According to the Bankruptcy Act, prefiling credit counseling sessions should provide an analysis of the client’s current financial condition and the factors that led to it, an individualized budget analysis, and assistance in developing an appropriate action plan. According to providers and Trustee Program data, the great majority of debtors fulfill the credit counseling requirement by telephone or via the Internet. We did not find evidence that agencies that provided prefiling credit counseling discouraged clients from filing for bankruptcy and very few clients appeared to be entering into repayment plans administered by these agencies. However, it is not clear whether the prefiling requirement is serving its intended purpose—as described in the Bankruptcy Act’s accompanying conference report—of helping consumers make an informed choice about bankruptcy and its alternatives. Anecdotal evidence suggests that by the time most consumers receive the prefiling counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy.
However, the Trustee Program does not track and monitor the outcomes of counseling sessions, including how often they are followed by a bankruptcy filing, in large part because this is not required under the program’s statutory responsibilities. Better data on the outcomes of counseling sessions could help program managers and policymakers determine how well the prefiling requirement is serving its intended purpose. Finally, we found that participants in the bankruptcy process and other experts believed that the debtor education course was generally a useful tool to improve debtors’ financial literacy.
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.
Providers typically charge about $50 per session and evidence suggests fees are being waived as appropriate for clients unable to pay, as the Bankruptcy Act requires.
Although comprehensive data were not available, evidence from our review suggests that counseling and education sessions typically cost about $50 or less, and industry observers and consumer advocates we spoke with generally considered this amount to be reasonable. Providers’ policies for waiving fees varied and Trustee Program data on the 3 largest providers showed significant variations in the proportion of clients whose fees were waived—from 4% to 26% for credit counseling sessions and from 6% to 34% for debtor education courses. The Bankruptcy Act requires that providers charge reasonable fees and offer their services without regard to an individual’s ability to pay, but does not specify what constitutes a “reasonable” fee or “ability to pay.” The Trustee Program did not promulgate rules or provide specific guidance about what constitutes a debtor’s ability to pay in order to give providers the flexibility to respond to market conditions. However, formalized guidance would help reduce uncertainty among providers about when to waive fees and would provide a minimum benchmark for reducing or waiving fees.
The Bankruptcy Act describes the required prefiling credit counseling as “an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outline[s] the opportunities for available credit counseling and assist[s] such individual in performing a related budget analysis.” 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 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.
According to a Trustee Program official, the statutory language requiring a “briefing. . . that outline[s] opportunities for available credit counseling” has been interpreted by the Trustee Program and providers involved to mean a credit counseling session. 11 U.S.C. § 109(h)(1).8
As of January 2007, providers must submit data semiannually to the Trustee Program on the number of their prefiling credit counseling clients who enter into debt management plans. In addition, the Trustee Program’s Quality Service Reviews will examine information on the outcomes of counseling sessions at selected providers. However, the information these sources will provide is limited, in large part because providers do not track whether their clients subsequently filed for bankruptcy.
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.
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.
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 4 major 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.
Trustee Program data collected on certificates issued between July 11 and October 17, 2006, indicated that 50% of predischarge education sessions was conducted by Internet, 29% was conducted via telephone, and 21% was conducted in person. In-person debtor education courses are typically conducted in a group classroom setting, while telephone sessions are conducted in one-on-one or group settings. For Internet sessions, the client generally reads the educational material and takes an on-line quiz, and then may have a follow-up discussion with an instructor. The Trustee Program does not require that debtor education conducted via the Internet include individual communication with a counselor, but a counselor must be made available to answer any questions clients may have.
Most representatives of consumer groups, panel trustees, bankruptcy attorneys, and others we spoke with believed that the predischarge debtor education course was likely to help improve consumers’ financial literacy. They noted, for example, that consumers completing bankruptcy should receive guidance on budgeting, avoiding future debt, and rebuilding credit. The National Association of Chapter 13 Trustees established a similar debtor education course several years before the Bankruptcy Act took effect. According to representatives of Chapter 13 trustees, these courses were particularly helpful for debtors under Chapter 13 bankruptcy protection, who operate under a repayment plan for up to 5 years, and debtors who took the course were more likely to successfully complete their repayment plans.45
45 Chapter 13 trustees administer cases filed under Chapter 13 of the Bankruptcy Code. The National Association of Chapter 13 Trustees is a nonprofit membership organization that includes Chapter 13 Trustees and staff, attorneys, judges, and other related professionals.
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.
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.
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% 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 3 largest providers all use differing criteria—one told us it waived fees for clients at or below 150% of the poverty line, a second for clients at or below 120% 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 3 largest providers waived their fees 4%, 15%, and 26% of the time for credit counseling sessions, and 6%, 21%, and 34% of the time for debtor education courses. A Trustee Program official told us that 3 factors were responsible for the differences in the proportions of clients whose fees were reported waived.
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.
Summary: Credit counselors are generally competent, but credit counseling isn’t effective. Debtor education is more beneficial.
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.
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.
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, 2 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.
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.
For example, one large nationwide provider estimated that less than ½ of 1% 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. If a provider offers sessions in Spanish, this information is included in the main listing for the provider; for the 29 other languages, consumers can conduct a search via a drop-down menu. 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.
The content of the required credit counseling and debtor education sessions generally complied with statutory and program requirements. Participants in the bankruptcy process largely believed the education requirement—a general financial literacy course—to be beneficial. However, the value of the counseling requirement is not clear. The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet anecdotal evidence suggests that by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options. Because no mechanism currently exists to track the outcomes of the counseling, policymakers and program managers are unable to fully assess how well the requirement is serving its intended purpose.
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% 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% 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 5 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 5 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.
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 7 bankruptcy courts that the Administrative Office of the U.S. Courts surveyed at our request, as few as 4.5% and as many as 24.9% of debtors filed pro se.52 At the initial meeting with a client, a bankruptcy attorney will typically tell the client about the credit counseling requirement. The attorney will often give the client contact information for approved counseling agencies and may provide a room with a telephone so that clients can fulfill the counseling requirement on the spot.
52 The 7 bankruptcy courts surveyed by the Administrative Office of the U.S. Courts at our request were the Central District of California, the Northern District of California, the District of Colorado, the District for the District of Columbia, the Northern District of Illinois, the Northern District of Texas, and the Western District of Washington. These 7 courts were chosen to represent different regions of the country. Because of the small sample size, information from these courts provides anecdotal information but cannot be projected to represent all bankruptcy courts.
Debtors who file for bankruptcy without fulfilling the credit counseling requirement can face a variety of consequences. A survey conducted by the Federal Judicial Center asked U.S. bankruptcy judges what procedures they follow when a debtor has not produced a prefiling credit counseling certificate.53 When asked in the survey to select one or more, 44% of judges said they had given such filers a specified period to produce the certificate, 34% had issued an Order to Show Cause or otherwise set a hearing on the deficiency, 20% had taken no action, and 13% had dismissed the case. The survey also showed that 35% of the judges said they treated imminent foreclosure or eviction, by itself, as an exigent circumstance, while about 55% treated this as an exigent circumstance only if the debtors could satisfactorily explain why they had not yet received credit counseling. Another 10% 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.
53 Federal Judicial Center, Implementing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Early Experience (May 17, 2006). The survey was conducted by the Federal Judicial Center—the education and research agency for the U.S. Courts—in March 2006 to collect information about judges’ early experiences with the credit counseling requirement. The survey was sent to 312 active and 29 former bankruptcy judges; 157 of these responded to the survey.
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 6 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 the implementation of the credit counseling requirement in these 2 states, we spoke with 2 bankruptcy administrators, one in Alabama and one in North Carolina, and an official of the Administrative Office of the U.S. Courts.
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.
The Department of Justice’s U.S. Trustee Program, which is responsible for the new requirements, should:
The GAO (The Government Accountability Office, the audit, evaluation and investigative arm of Congress) concluded that from 5/31/2006 - 10/27/06, 373,615 personal certificates were issued (and counting joint filers as 1), and they determined that 10% did not, within the time frame considered, file for bankruptcy.
The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability.
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