Bankruptcy Reform:

Value of Credit Counseling Requirement Is Not Clear

GAO-07-203: Published: Apr 6, 2007. Publicly Released: Apr 24, 2007.

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires individuals to receive credit counseling before filing for bankruptcy and to take a debtor education course before having debts discharged. Concerns were raised that the new requirements could expose consumers to abusive practices by credit counseling agencies or become barriers to filing for bankruptcy. GAO was asked to examine (1) the process of approving counseling and education providers, (2) the content and results of the counseling and education sessions, (3) the fees charged, and (4) the availability of and challenges to accessing services. To address these issues, GAO reviewed Trustee Program data and application case files, and interviewed a wide range of individuals and groups involved in the bankruptcy process.

The Trustee Program's process for approving credit counseling and debtor education providers was designed to help ensure that providers met statutory and program requirements and demonstrated evidence of proficiency, experience, and reputability. The Bankruptcy Act set certain standards for providers, and the program's July 2006 rule clarified these standards and formalized the application review process. As of October 2006, the Trustee Program had approved 153 credit counseling and 268 debtor education providers. These providers have had few formal complaints lodged against them, and federal and state law enforcement authorities with whom we spoke did not identify any recent enforcement actions against them under consumer protection laws. No provider approved by the Trustee Program had had its federal tax-exempt status revoked, although four providers' tax-exempt status was being examined by the Internal Revenue Service. The content of the required credit counseling and debtor education sessions generally complied with statutory and program requirements. Participants in the bankruptcy process largely believed the education requirement--a general financial literacy course--to be beneficial. However, the value of the 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. 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. Neither the statute nor Trustee Program guidance defines what constitutes "ability to pay," and policies vary among providers. Formal guidance on this issue would have several benefits, including ensuring compliance with a minimum benchmark for waiving fees. The number of counseling and education providers that have been approved appears sufficient to allow consumers to access these services in a timely manner. In-person sessions are available in most parts of the country, although the great majority of clients fulfill the requirements via telephone or Internet. The Trustee Program has efforts under way to help mitigate the challenges speakers of foreign languages can face in accessing services. Further, the bankruptcy courts have taken steps recently to help better ensure that filers are aware of the potential consequences of filing for bankruptcy without the required counseling certificate.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: 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.

    Agency Affected: Department of Justice

    Status: Closed - Implemented

    Comments: In September 2007, the Trustee Program granted a contract to ABT Associates for a study to track and examine the outcomes of bankruptcy credit counseling, including the extent to which those receiving the counseling subsequently file for bankruptcy. Abt Associates has completed a comprehensive study design that would track consumers receiving credit counseling for 18 months--that is, ABT developed a mechanism that can be used to assess the outcomes of bankruptcy credit counseling.

    Recommendation: 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 Affected: Department of Justice

    Status: Closed - Implemented

    Comments: The Trustee Program published interim final rules for credit counseling agencies and debtor education agencies on February 1, 2008 and November 14, 2008, respectively. The rules included guidance on what constitutes "ability to pay," specifying that lack of ability to pay shall be presumed if the debtor's household income is beneath 150% of the poverty line. The guidance was written in a manner that would not limit or discourage providers who also wish to waive fees for some clients above 150% of the poverty line.

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