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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended the federal bankruptcy code to require (1) individuals to receive budget and credit counseling from an approved provider before filing a petition in bankruptcy and (2) bankruptcy petitioners to complete an instructional course on personal financial management (debtor education) in order to have their debts discharged. 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
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.
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 outlines the opportunities for available credit counseling and assists debtors 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.
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. Although many debtors see the credit counseling as an obstacle, and, indeed, most are too far into debt to hope to climb out of it through a repayment plan, even a renegotiated plan for lesser amounts, any debtor filing for bankruptcy must have the certificate and the repayment plan offered by the credit counselor. The certificate is good for 180 days, so the debtor must file for bankruptcy by then to use the certificate; otherwise, he will have to get another one.
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% 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.
Providers typically charge about $50 per session, and in some cases, fees are being waived as appropriate for clients unable to pay, as the Bankruptcy Act requires. The cost must be presented to the debtor before the session begins, and providers cannot charge a separate fee for issuing the counseling certificate.
According to a recent GAO report, 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. 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.”
According to Trustee Program data, the 3 largest providers waived their fees 4%, 15%, and 26% of the time for credit counseling sessions.
To get a valid certificate, the debtor must use a provider approved by the United States Trustee for a given judicial district. Thus, the debtor would have to determine which district he is in, and then find a provider approved for that district—the debtor can find all of this information on the U.S. Trustee’s website, including which providers providing courses in languages other than English.
The debtor must then contact the provider, and make arrangements for the counseling session, which will be 60 to 90 minutes long. It can be done in a classroom, over the telephone, or over the Internet, but the available options depend on the specific provider. So if you want to use the Internet, then you must be certain to choose a provider that offers that option. Most people choose the Internet or the telephone, because it is more convenient and faster. Many providers can commence the session within 24 hours using the telephone or the Internet. In fact, using the Internet, the session can begin almost immediately. Many times, the debtor first learns of the credit counseling requirement consulting with a lawyer, and many lawyers, if they are hired, place the debtor in a room immediately to use the phone or the Internet to get the counseling session done.
When the session is done, the counselor will prescribe a repayment plan. However, most debtors are too far into debt to make any repayment plan feasible. Indeed, most debtors learn of the credit counseling requirement after they have already decided to file for bankruptcy. In any case, it is not necessary to follow the plan to file for bankruptcy, but the debtor does need the certificate and the repayment plan to file.
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. A bankruptcy petitioner must provide to the court the certificate to document having satisfied the prefiling counseling requirement.
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 that were interviewed generally estimated that fewer than 2% of prefiling credit counseling clients entered into debt management plans. Furthermore, 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 that were interviewed said 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 5 cases, the program was satisfied that either the complaint lacked merit or the provider had taken appropriate steps to remediate the problem.
Another requirement for debtors to get a bankruptcy discharge is to take a personal financial management course, usually known as debtor education. However, this requirement can be satisfied during the bankruptcy; it does not have to be taken before bankruptcy, although it can be.
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:
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.” However, debtor education sessions typically cost about $50 or less—about the same amount as credit counseling.
Providers have varying policies for determining a client’s ability to pay the fee. Some providers, according to a recent report, used as their threshold a percentage of the poverty line or other criteria, such as whether the client received legal aid or disability benefits. The 3 largest providers use differing criteria—one 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 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 6%, 21%, and 34% of the time for debtor education courses. The differences arose from differences in their fee waiver policy, in the discretion given to employees to waive the fee even when it contradicted the official policy, and, in some cases, the client simply didn’t pay.
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 providers’ waiver policies must be clear and objective. 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. Providers cannot charge a separate fee for issuing the education certificate.
In the future, the United States Trustee may require more formal criteria to determine a debtor’s ability to pay. According to some suggestions, fee waiver policies may be based on local economic conditions and costs of doing business.
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 pre-discharge 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.
Credit Counseling & Debtor Education - This site, by the United States Trustee, provides information about the approved providers for credit counseling and debtor education. You can choose all providers for a particular state or territory, or all providers that provide services in a particular language.
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