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Before the Subcommittee on Commercial and Administrative Law, Committee 
on the Judiciary, House of Representatives: 

United States Government Accountability Office: 


For Release on Delivery Expected at 10:30 a.m. EDT: 

Tuesday, May 1, 2007: 

Bankruptcy Reform: 

Value of Credit Counseling Requirement Is Not Clear: 

Statement of Yvonne D. Jones, Director: 
Financial Markets and Community Investment: 


GAO Highlights: 

Highlights of GAO-07-777T, a testimony before the Subcommittee on 
Oversight of Government Management, the Federal Workforce, and the 
District of Columbia, Committee on Homeland Security & Governmental 
Affairs, U.S. Senate 

Why GAO Did This Study: 

The Financial Literacy and Education Improvement Act created, in 
December 2003, the Financial Literacy and Education Commission. This 
statement is based on a report issued in December 2006, which responded 
to the act’s mandate that GAO assess the Commission’s progress in (1) 
developing a national strategy; (2) developing a Web site and hotline; 
and (3) coordinating federal efforts and promoting partnerships among 
the federal, state, local, nonprofit, and private sectors. To address 
these objectives, GAO analyzed Commission documents, interviewed its 
member agencies and private financial literacy organizations, and 
benchmarked the national strategy against GAO’s criteria for such 

What GAO Found: 

The National Strategy for Financial Literacy serves as a useful first 
step in focusing attention on financial literacy, but it is largely 
descriptive rather than strategic and lacks certain key characteristics 
that are desirable in a national strategy. The strategy provides a 
clear purpose, scope, and methodology and comprehensively identifies 
issues and challenges. However, it does not serve as a plan of action 
designed to achieve specific goals, and its recommendations are 
presented as “calls to action” that generally describe existing 
initiatives and do not include plans for implementation. The strategy 
also does not fully address some of the desirable characteristics of an 
effective national strategy that GAO has previously identified. For 
example, it does not set clear and specific goals and performance 
measures or milestones, address the resources needed to accomplish 
these goals, or fully discuss appropriate roles and responsibilities. 
As a result of these factors, most organizations that GAO spoke with 
said the strategy was unlikely to have a significant impact on their 
financial literacy efforts. 

The Commission has developed a Web site and telephone hotline that 
offer financial education information provided by numerous federal 
agencies. The Web site generally serves as an effective portal to 
existing federal financial literacy sites. Use of the site has grown, 
and it averaged about 69,000 visits per month from October 2006 through 
March 2007. The volume of calls to the hotline—which serves as an order 
line for a free tool kit of federal publications—has been limited. The 
Commission has not tested the Web site for usability or measured 
customer satisfaction with it; these are recommended best practices for 
federal public Web sites. As a result, the Commission does not know if 
visitors are able to find the information they are looking for 
efficiently and effectively. 

The Commission has taken steps to coordinate the financial literacy 
efforts of federal agencies and has served as a useful focal point for 
federal activities. However, coordinating federal efforts has been 
challenging, in part because the Commission must achieve consensus 
among 20 federal agencies, each with its own viewpoints, programs, and 
constituencies, and because of the Commission’s limited resources. A 
survey of overlap and duplication and a review of the effectiveness of 
federal activities relied largely on agencies’ self-assessments rather 
than the independent review of a disinterested party. The Commission 
has taken steps to promote partnerships with the nonprofit and private 
sectors through various public meetings, outreach events, and other 
activities. The involvement of state, local, nonprofit, and private 
organizations is important in supporting and expanding Commission 
efforts to increase financial literacy, and our report found that the 
Commission could benefit from further developing mutually beneficial 
and lasting partnerships with these entities that will be sustainable 
over the long term. 

What GAO Recommends: 

In its report, GAO recommended that the Commission (1) incorporate 
additional elements into the national strategy to help measure results 
and ensure accountability, (2) conduct usability tests of and measure 
customer satisfaction with its Web site, (3) provide for an independent 
reviewer to evaluate duplication and effectiveness of federal 
activities, and (4) expand upon current efforts to cultivate 
sustainable partnerships with nonprofit and private entities. The 
Commission has taken steps to address some of these recommendations. 


To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Yvonne D. Jones, (202) 
512-8678 or 

[End of section] 

Madam Chairwoman and Members of the Subcommittee: 

I appreciate the opportunity to participate in today's hearing on the 
impact of the Bankruptcy Abuse Prevention and Consumer Protection Act 
of 2005 (Bankruptcy Act).[Footnote 1] My statement today focuses on the 
credit counseling and debtor education requirements of the act and is 
based on our report that was released last month and prepared at the 
request of members of the Senate and House Judiciary 
Committees.[Footnote 2] 

Among other things, the Bankruptcy Act requires individuals to receive 
credit counseling before filing for bankruptcy and to take a debtor 
education course before having their debts discharged.[Footnote 3] 
According to the legislative history of the act, a goal of the 
prefiling credit counseling requirement, which became effective in 
October 2005, is to ensure that consumers understand the options 
available to them and the consequences of filing for bankruptcy. 
However, the requirement raised a number of concerns, in part due to 
ongoing investigations of certain practices within the credit 
counseling industry, such as steering clients into inappropriate debt 
repayment plans. In addition, some members of Congress and others were 
concerned that the cost and availability of counseling and education 
services could serve as barriers to those seeking to file for 
bankruptcy. In response to these concerns, Congress required in the 
Bankruptcy Act that providers of credit counseling and debtor education 
courses meet certain criteria and obtain approval from the Department 
of Justice's U.S. Trustee Program (the Trustee Program).[Footnote 4] 

My statement discusses (1) the actions taken by the Trustee Program to 
approve credit counseling and debtor education providers; (2) the 
content and results of the counseling and education sessions; (3) the 
fees providers charge for counseling and education services, and the 
extent to which these services are provided regardless of clients' 
ability to pay; and (4) the availability of approved counseling and 
education services and the challenges consumers may face in receiving 
these services. Our report, and this testimony, are based on extensive 
audit work that included, among other things, a review of relevant 
policies, rules, guidance, and procedures; a case file review of a 
nonprobability sample of 43 providers approved by the Trustee Program; 
and interviews with representatives of relevant federal and state 
agencies, trade associations, consumer groups, and 10 approved 
providers of credit counseling or debtor education. We conducted our 
review from February 2006 through March 2007 in Washington, D.C., and 
Boston, Ma., in accordance with generally accepted government auditing 

In summary: 

* We found the Trustee Program's process for approving credit 
counseling and debtor education providers was generally systematic and 
thorough, and designed to help ensure that the providers met statutory 
and program requirements and demonstrated evidence of proficiency, 
experience, and reputability. The Bankruptcy Act set certain standards 
for providers, and the program's July 2006 interim final rule clarified 
these standards and formalized the application review process. As of 
October 2006, the Trustee Program had approved 153 credit counseling 
and 268 debtor education providers. These providers have had few formal 
complaints lodged against them, and federal and state law enforcement 
authorities with whom we spoke did not identify any recent enforcement 
actions against them under consumer protection laws. As of the date of 
our report, no provider approved by the Trustee Program had had its 
federal tax-exempt status revoked. However, the Internal Revenue 
Service (IRS) was examining the tax-exempt status of four providers, 
and Trustee Program officials said that they were carefully monitoring 
the situation. 

* The content of the required credit counseling and debtor education 
sessions generally complied with statutory and program requirements. 
Participants in the bankruptcy process largely believed the education 
requirement--a general financial literacy course--to be beneficial. In 
addition, we did not find evidence that prefiling credit counseling 
agencies discouraged clients from filing for bankruptcy, and very few 
clients appeared to be entering into debt repayment plans administered 
by these agencies. However, the value of the credit counseling 
requirement is not clear. The counseling was intended to help consumers 
make informed choices about bankruptcy and its alternatives. Yet 
anecdotal evidence suggests that by the time most clients receive the 
counseling, their financial situations are dire, leaving them with no 
viable alternative to bankruptcy. As a result, the requirement may 
often serve more as an administrative obstacle than as a timely 
presentation of meaningful options. Because no mechanism currently 
exists to track the outcomes of counseling sessions--including how 
often they are followed by a bankruptcy filing--policymakers and 
program managers are unable to fully assess how well the requirement is 
serving its intended purpose. Our report recommends that the Trustee 
Program develop the capability to track and analyze the outcomes of 
prefiling credit counseling. In responding to a draft of our report, 
the Trustee Program said it concurred with this recommendation. 

* Providers typically charge about $50 or less per session, and 
industry observers and consumer advocates we spoke with generally 
considered this amount to be reasonable. Evidence suggests fees are 
being waived as appropriate for clients unable to pay, as the 
Bankruptcy Act requires. Neither the statute nor the Trustee Program 
guidance defines what constitutes "ability to pay," and policies vary 
among providers. Our report recommends that the Trustee Program issue 
formal guidance on what constitutes ability to pay, so as to help 
reduce uncertainty among providers about when to waive fees and to 
provide a minimum benchmark for reducing or waiving fees. The program 
concurred with our recommendation. 

* The number of approved counseling and education providers appears to 
be sufficient to allow consumers to access these services in a timely 
manner. Three large nationwide organizations represent about half of 
the market for both services. In-person counseling and education 
sessions are not available in certain parts of the country, but the 
great majority of clients seek to fulfill the requirements via 
telephone or Internet. The Trustee Program has efforts under way to 
help mitigate the challenges speakers of foreign languages can face in 
accessing services. Further, the bankruptcy courts have taken measures 
recently--on their filing forms and Web sites--to make the prefiling 
counseling requirement more conspicuous to filers who are not 
represented by an attorney. 


Federal courts have jurisdiction over bankruptcy cases and petitions 
can be filed in any one of the nation's 94 judicial districts. The 
Trustee Program, a component of the Department of Justice, oversees the 
bankruptcy process for most of these districts and acts to ensure 
compliance with applicable laws and procedures.[Footnote 5] The 
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was 
signed into law on April 20, 2005, and most of its provisions became 
effective on October 17, 2005. The act made substantial changes to the 
Bankruptcy Code, including adding new credit counseling and debtor 
education requirements, as follows: 

* Credit Counseling. To be a "debtor" (that is, eligible to file for 
bankruptcy), an individual, except in limited circumstances, must 
receive from an approved provider, within 180 days preceding the date 
of filing a bankruptcy petition, (1) a briefing outlining the 
opportunities available for credit counseling and (2) assistance with 
performing a budget analysis. Individuals may satisfy the counseling 
requirement post-petition if the individual certifies the existence of 
exigent circumstances that merit a waiver.[Footnote 6] 

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

The Bankruptcy Act designated the Trustee Program as responsible for 
the implementation of these requirements, including the development of 
rules and guidance and the certification of approved credit counseling 
and debtor education entities. 

Credit counseling agencies generally work on behalf of their consumer 
clients, who are typically deeply in debt, to help them manage their 
existing financial problems and to teach them better financial 
management skills for the future. The Federal Trade Commission (FTC) 
and others have noted that many credit counseling agencies operate 
honestly and fairly and provide valuable services to financially 
distressed consumers. However, starting in the 1990s consumer 
complaints about some participants in the credit counseling industry 
spurred federal and state investigations into the activities of many 
credit counseling agencies. Over the past few years, the FTC has 
settled enforcement actions against several agencies, and the IRS has 
undertaken a broad examination effort of credit counseling 
organizations for compliance with the Internal Revenue Code. 

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

The Bankruptcy Act provided that credit counseling and debtor education 
agencies meet certain minimum requirements designed to ensure that 
providers are adequately qualified and to prevent abusive practices. 
For example, with regard to credit counseling, the Trustee Program may 
approve only entities that are nonprofit organizations, have an 
independent board of directors, provide full disclosures to clients on 
certain items, and provide trained counselors with adequate 
experience.[Footnote 8] The act required the Trustee Program to 
undertake a thorough review of the qualifications of a credit 
counseling or debtor education agency before approving it to provide 
services. In July 2006, the Trustee Program adopted an interim final 
rule setting forth application procedures designed to ensure that only 
organizations meeting the minimum qualification standards set forth in 
the Bankruptcy Act would be approved to provide services.[Footnote 9] 

To implement the relevant provisions of the Bankruptcy Act, the Trustee 
Program established its Credit Counseling and Debtor Education Unit in 
June 2005 and developed a process for approving providers.[Footnote 10] 
A wide range of industry participants told us that the Trustee Program 
had generally been successful in setting up an infrastructure, 
establishing guidance and an application process, and approving 
providers within a very limited time frame. Credit counseling agencies 
applying to become approved providers--or reapplying to maintain their 
status as providers--must provide the Trustee Program with a variety of 
information that is used to evaluate the agencies' qualifications, 
including the written materials the agencies use in providing credit 
counseling services and information on debt management plans serviced 
by the agency.[Footnote 11] In addition, applicants must disclose 
information about their nonprofit status and any actions that have 
affected the organization, including any revocations of licenses or 
accreditations, investigations, and legal, disciplinary or enforcement 

In general, we found that the Trustee Program's process for reviewing 
applicants was generally systematic and thorough and designed to ensure 
that the applicants approved by the program met the qualification 
standards set forth in the Bankruptcy Act. For example, the review 
process includes measures to evaluate the applicants' character and 
standing in the credit counseling industry. In particular, agencies 
that enter a high proportion of clients into debt management plans may 
be asked to provide additional information on the number and nature of 
these plans. In some cases we reviewed, the Trustee Program required 
applicants to make modifications to their programs or processes, such 
as adding additional material to the disclosure statements provided to 
clients, before it would approve the providers. 

As of October 2006, the Trustee Program had approved 153 credit 
counseling providers. As required by statute, all of these providers 
were nonprofit organizations, and about 94 percent of them had federal 
tax-exempt status under section 501(c)(3) of the Internal Revenue Code. 
The program had also approved 268 debtor education providers by October 
2006, of which at least one-third were organizations exempt under 
section 501(c)(3). Many providers were approved for both credit 
counseling and debtor education, and three large nationwide companies 
have provided about half of the sessions for both of these services. 

There have been relatively few complaints raised about providers' 
competence or integrity. The great majority of representatives of 
consumer advocacy groups, federal agencies, industry participants, and 
other stakeholders we spoke with believed that the credit counseling 
agencies approved by the Trustee Program have been reputable. In 
addition, no federal or state law enforcement officials we spoke with 
identified any federal or state enforcement actions related to consumer 
protection issues against any credit counseling providers subsequent to 
their approval. Between October 2005 and October 2006, the Trustee 
Program received 124 complaints about credit counseling and debtor 
education providers, out of more than 930,000 certificates issued. Our 
analysis found that many of the complaints were related to 
administrative issues, such as the timely issuance of a debtor's 
certificate. Twenty complaints alleged unfair or inappropriate 
practices, such as giving legal advice, discouraging customers from 
filing for bankruptcy, or failing to inform clients about the 
possibility of a fee waiver. Our review of a selection of complaints 
found that the Trustee Program took action to assess and follow up on 
each complaint. In no case did a complaint result in the Trustee 
Program removing a provider from the approved list, according to a 
program official. 

As part of its Credit Counseling Compliance Project, which began in 
October 2003, IRS began a broad examination effort of the entire credit 
counseling industry, focusing on whether agencies met the requirements 
for federal tax exemption under section 501(c)(3) of the Internal 
Revenue Code.[Footnote 12] As of March 2007, IRS had completed 47 
examinations, which in all cases resulted in either revocation, 
proposed revocation, or other termination of the agencies' tax-exempt 
status. The IRS noted that these revocations occurred because these 
organizations served primarily to get clients into debt management 
plans, offered little or no counseling or education, and appeared to be 
motivated mostly by profit. 

No credit counseling provider approved by the Trustee Program had had 
its federal 501(c)(3) tax-exempt status revoked as of March 2007, 
according to publicly available documents we reviewed. However, IRS 
officials told us that four of the credit counseling agencies still 
under examination were agencies approved by the Trustee Program. A 
Trustee Program official told us that although the Trustee Program was 
aware of the ongoing IRS examinations of these four agencies, it 
approved their applications to become counseling providers because the 
agencies had satisfied the qualification requirements of the Bankruptcy 
Act and the Trustee Program's interim final rule.[Footnote 13] The 
official said that should IRS revoke an agency's tax-exempt status, the 
program would carefully review the reasons for the revocation and take 
whatever actions the program deemed appropriate. 

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

According to the Bankruptcy Act, the prefiling credit counseling 
session should provide clients with individualized assessments and help 
them develop a plan to respond to their financial situation. We did not 
find evidence that counselors were providing biased information and few 
clients appear to be entering debt management plans. However, a wide 
range of observers have questioned the value of the credit counseling 
requirement since by the time most clients received the counseling 
their financial situations were dire, leaving them with no realistic 
alternative to bankruptcy. By contrast, most observers we spoke with 
believed that the predischarge debtor education requirement--a general 
financial literacy course--was beneficial. 

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[s] the opportunities for 
available credit counseling and assist[s] such individual in performing 
a related budget analysis."[Footnote 14] The act requires that this 
session include an analysis of a client's current financial condition 
and the factors that caused this condition and help develop a plan to 
respond to the client's problems that would not involve incurring 
additional debt. Trustee Program officials told us that it was widely 
understood that the content of the prefiling counseling session would 
closely resemble the traditional sessions that reputable credit 
counseling agencies had provided for many years. 

Our review of the Trustee Program's case files and counseling materials 
of 15 credit counseling providers--representing more than two-thirds of 
certificates issued--showed that the content of the credit counseling 
sessions, as described in the written materials, was in accordance with 
the requirements of the Bankruptcy Act. Credit counseling sessions 
generally began with providers collecting data on the client's 
finances, including sources and amount of income, debt, and expenses. 
Individual counselors then typically analyzed the data with a software 
program and provided the client with a personalized budget. They 
discussed the client's financial goals and potential opportunities for 
reducing spending and paying off debt. Counselors then described the 
client's options--for example, developing a budget, entering into a 
debt management plan, or filing a Chapter 7 or Chapter 13 bankruptcy. 
When the sessions were over, counselors issued certificates verifying 
that the client has completed the prefiling credit counseling 

Although most providers offered clients the option of conducting credit 
counseling sessions in person, available data indicated that most 
debtors fulfilled their prefiling requirements by telephone or via the 
Internet. Trustee Program data collected on certificates issued between 
July 11 and October 17, 2006, indicated that 45 percent of all 
prefiling counseling sessions were conducted by telephone, 43 percent 
were conducted via the Internet, and 13 percent were conducted in 
person.[Footnote 15] Academic researchers, counseling providers, and 
other experts we spoke with said that although in-person counseling may 
have advantages, telephone counseling can be an effective method of 
delivery. We did not find any significant research on the effectiveness 
of credit counseling facilitated via the Internet. To receive 
counseling using this method, a client generally logs on to the 
provider's Web site and inputs the same data on his or her finances 
that would be provided during a telephone or in-person session. On the 
basis of these data, the client is typically provided information and a 
financial analysis, including a description of the available 
alternatives. Trustee Program officials told us all approved Internet- 
based credit counseling sessions were required to include a separate 
component in which the client communicated individually with a 

Prior to passage of the Bankruptcy Act, some consumer advocacy groups, 
policymakers, and others expressed concerns that credit counseling 
provided under the act might sometimes be biased and not in the 
clients' best interests. Specifically, concerns existed that providers 
might inappropriately discourage clients from filing for bankruptcy and 
instead encourage them to enter into debt management plans that 
benefited the agency but not the debtor. However, available evidence 
indicates that only a very small number of clients--fewer than 2 
percent--receiving prefiling credit counseling have entered into any 
debt management plan.[Footnote 16] In general, representatives of 
consumer groups, panel trustees, and others told us that they had not 
observed cases where prefiling counseling agencies inappropriately 
encouraged clients to avoid filing for bankruptcy.[Footnote 17] As of 
October 2006, the Trustee Program had received only five formal 
complaints--out of more than 650,000 credit counseling certificates 
issued--alleging that providers made harmful or inappropriate 

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

The report of the House of Representatives Committee on the Judiciary 
that accompanied the bill that became the Bankruptcy Act indicated that 
the purpose of the credit counseling provisions was to ensure that 
consumers could "make an informed choice about bankruptcy, its 
alternatives, and consequences."[Footnote 18] The report further noted 
that the counseling was intended to give consumers in financial 
distress "an opportunity to learn about the consequences of bankruptcy-
-such as the potentially devastating effect it can have on their credit 
rating" before they decided to file for bankruptcy relief.[Footnote 19] 

However, it is unclear whether the credit counseling requirement is 
achieving its intended purpose. While quality credit counseling can, in 
general, be beneficial, a wide range of observers whom we spoke with-- 
including representatives of federal agencies and bankruptcy attorneys; 
consumer advocates; and several counseling providers--told us that the 
timing of the counseling conducted to fulfill the requirement of the 
Bankruptcy Act could mitigate its value. The federal Financial Literacy 
and Education Commission noted in its national strategy that reputable 
credit counseling could have a significant positive impact, making 
borrowers more creditworthy and decreasing their debt. But the strategy 
also recommended that consumers seek credit counseling services early, 
when financial problems started, in order to avoid potential 
bankruptcy.[Footnote 20] In practice, however, by the time individuals 
obtain prefiling credit counseling, they usually have already consulted 
with a bankruptcy attorney and have serious financial problems, such as 
imminent foreclosure on their homes. As such, anecdotal evidence 
indicates that the great majority of clients receiving prefiling 
counseling have few viable alternatives to bankruptcy.[Footnote 21] The 
Bankruptcy Act's credit counseling requirement therefore may not be 
serving its purpose of helping consumers make informed choices about 
whether or not to file for bankruptcy. Providers and others told us 
that many clients perceived the counseling session as an administrative 
obstacle rather than a useful exercise. 

Questions about the value of the prefiling requirement stem from a 
widespread belief among observers that nearly all of the consumers that 
receive the credit counseling subsequently file for bankruptcy. Yet the 
evidence for this is largely anecdotal, as comprehensive data do not 
currently exist on the outcomes of those consumers who receive 
prefiling credit counseling. Neither the Trustee Program, credit 
counseling providers, or any other party currently tracks how many 
consumers who receive credit counseling subsequently file for 
bankruptcy. A Trustee Program official told us that the program had not 
taken steps to track and monitor these outcomes because doing so was 
not part of its statutory responsibilities. As we have reported in the 
past, meaningful data on program outcomes and costs are essential for 
appropriate oversight and decision making.[Footnote 22] Without 
reliable data on the outcomes of the prefiling credit counseling 
sessions, policymakers and program managers lack the information that 
would allow them to determine how well the statutory requirement is 
truly serving to inform consumers about their options. In our report, 
we recommend that the Trustee Program develop a mechanism that would 
allow the program or other parties to track the outcomes of prefiling 
credit counseling, including the number of individuals issued 
counseling certificates who then file for bankruptcy. This may involve 
working in conjunction with the Administrative Office of the U.S. 
Courts to ensure that the unique certificate numbers issued by the 
Trustee Program can be linked to bankruptcy petitions filed with the 
courts. In commenting on a draft of our report, the Trustee Program 
said that it concurred with this recommendation and noted that it plans 
to refine and expand its current tracking and data collection methods, 
as well as explore the feasibility of developing more comprehensive 
outcome measures. 

Debtor Education Sessions Are Designed to Offer Financial Management 

The debtor education requirement is described in the Bankruptcy Act as 
an "instructional course concerning personal financial management," 
which may be provided in person, by telephone, or via the 
Internet.[Footnote 23] The Trustee Program's interim final rule 
specified that the course should include written information and 
instruction on four major topics: budget development, money management, 
wise use of credit, and consumer information.[Footnote 24] We reviewed 
the debtor education curricula, teaching guides, and other materials 
from 17 debtor education providers, and found that the content included 
the topics and elements that the Trustee Program required. Trustee 
Program data collected on certificates issued between July 11 and 
October 17, 2006, indicated that 50 percent of predischarge education 
sessions were conducted by Internet, 29 percent via telephone, and 21 
percent in person. 

Most representatives of consumer groups, bankruptcy attorneys, and 
other observers we spoke with believed that the predischarge debtor 
education course was likely to help improve consumers' financial 
literacy. As we have noted in earlier reports, we believe that ensuring 
that Americans have the knowledge and skills to manage their money 
wisely is a key element in improving the economic health of our nation 
for current and future generations.[Footnote 25] Financial education 
efforts that seek to achieve goals such as reducing Americans' debt are 
key to helping improve our citizens' economic security and our 
country's economic growth. 

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

The Bankruptcy Act requires that credit counseling and debtor education 
providers charge reasonable fees for their services and provide these 
services without regard to the client's ability to pay. Trustee Program 
staff, providers, and trade association representatives told us that 
most providers charged around $50 each for their credit counseling and 
debtor education sessions. This estimate was corroborated by survey 
data collected from 107 providers by the National Foundation for Credit 
Counseling.[Footnote 26] Representatives of consumer groups and legal 
organizations, as well as academics and others we spoke with, generally 
believed that the fees credit counseling and debtor education providers 
had been charging were reasonable. 

The Trustee Program has required providers to disclose their fee 
schedules in their applications, and, as of July 2006, has also 
required providers to disclose their policies for reducing or waiving 
fees based on the client's ability to pay.[Footnote 27] A program 
official told us that providers' waiver policies are reviewed during 
the application process to ensure that they are clear and objective, 
and noted that in some cases applicants had been rejected for 
inadequate fee waiver policies. 

Providers' policies for waiving fees varied. For example, the three 
largest providers used differing criteria--one told us it waived fees 
for clients at or below 150 percent of the poverty line, a second for 
clients at or below 120 percent of the poverty line, and a third based 
on whether the client received free legal aid or had disability income. 
Providers we spoke with generally said that they allowed counselors to 
use their discretion to waive fees in additional circumstances as well. 
According to Trustee Program data, the three largest providers waived 
their fees 4 percent, 15 percent, and 26 percent of the time for credit 
counseling sessions, and 6 percent, 21 percent, and 34 percent of the 
time for debtor education courses. 

The Bankruptcy Act does not specify what constitutes a client's 
"ability to pay." In addition, the Trustee Program has not issued 
formal guidance on determining a client's ability to pay. Some 
providers told us that the lack of guidance left them unsure about the 
criteria they should use and said that additional guidance would be 
beneficial. Eight of the 22 comments to the Trustee Program's interim 
final rule submitted by providers, industry associations, and consumer 
groups requested that the program provide guidance or clarification on 
what constitutes a client's ability to pay. Trustee Program officials 
told us that they were considering issuing a rule that would formalize 
the criteria that providers should use to determine clients' ability to 
pay but that they had not made a final decision. 

We believe that clearer guidance on determining clients' ability to pay 
could have several benefits, including reducing uncertainty among 
providers, providing greater transparency, and ensuring compliance with 
minimum standards. As such, our report recommends that the Trustee 
Program issue formal guidance on what constitutes ability to pay. In 
developing this guidance, the program should examine the reasons behind 
the variations among providers in waiving fees. In addition, while this 
guidance should set a minimum benchmark for determining when fees 
should be reduced or waived, it should not limit or discourage 
providers that may wish to waive fees for more clients than qualify 
under the minimum benchmark. In its comment letter, the Trustee Program 
agreed with our recommendation and said it will promulgate formal fee 
waiver guidance in a rulemaking later this year. 

The Supply of Providers Appears Sufficient, and Actions Are Under Way 
to Address the Challenges Some Consumers May Face Fulfilling the 

Before the Bankruptcy Act went into effect, some members of Congress, 
consumer advocates, and others worried that not enough counseling 
services would be available within the required time frame for people 
filing for bankruptcy. Our review of the limited data available and 
anecdotal evidence indicated that the supply of credit counseling and 
debtor education services has been adequate to meet the demand for 
these services. When the Bankruptcy Act went into effect in October 
2005, the Trustee Program had approved 71 credit counseling and 76 
debtor education providers. By October 2006, this number had risen to 
153 credit counseling and 268 debtor education providers, including 
about a dozen that provide services nationwide. A wide range of 
participants in the bankruptcy process--including bankruptcy attorneys, 
a bankruptcy court representative, and service providers-- told us that 
getting access to these services in a timely manner had generally not 
been a barrier to filing or receiving discharge of debts. Additionally, 
some noted that consumers who called to schedule a credit counseling or 
debtor education session were usually accommodated within 24 hours, and 
sometimes much sooner. 

An analysis of existing data suggests that in-person counseling and 
education sessions are accessible to most of those who need them-- 
particularly in metropolitan areas--but are not easily accessible in 
certain portions of the country. However, this concern is somewhat 
mitigated by the fact that the great majority of clients appear to 
prefer telephone or Internet counseling. Among participants in the 
process with whom we spoke, the consensus was that debtors sought to 
conduct the counseling and education sessions by telephone or Internet 
because these were the quickest and most convenient methods for 
satisfying the statutory requirements. 

Some policymakers, consumer advocates, and others have expressed 
concern that the credit counseling requirement may create hardship for 
some debtors by delaying their ability to file a bankruptcy petition 
and receive the automatic stay that prohibits creditors from continuing 
to seek payment. This stay can be very important to some debtors--for 
example, those facing foreclosure on their homes. Some potential 
bankruptcy filers may face certain challenges in accessing credit 
counseling and debtor education. For example, consumer and language 
access advocates, as well as representatives of bankruptcy attorneys, 
told us they were concerned about the ability of some non-English 
speakers to receive counseling and education services in their native 
languages in a timely and effective manner. The Trustee Program has 
ongoing and planned measures in place to allow consumers to better 
identify language and translation services offered by providers. The 
program's Web site now allows users to identify providers offering 
services in any one of at least 29 languages. A program official told 
us that eventually the Web site should allow consumers to search, by 
provider and location, for all languages and translation services 

Finally, in some cases, individuals who were not represented by an 
attorney have reportedly attempted to file bankruptcy petitions without 
having met the prefiling credit counseling requirement. To help 
mitigate this issue, the uniform set of Official Bankruptcy Forms used 
by the courts was modified to include a separate exhibit that 
petitioners attach to attest to compliance with the requirement. 
Further, the bankruptcy courts have sought to make the requirement more 
prominent on their Web sites. 

Madam Chairwoman, this completes my prepared statement. I would be 
happy to respond to any questions you or other members of the 
Subcommittee may have at this time. 

Contacts and Acknowledgments: 

For further information on this testimony, please contact Yvonne D. 
Jones at (202) 512-8678. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this statement. Individuals making key contributions to this 
testimony include Jason Bromberg, Anne A. Cangi, Emily R. Chalmers, 
Carl M. Ramirez, and Omyra Ramsingh. 


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

[2] GAO, Bankruptcy Reform: Value of Credit Counseling Requirement Is 
Not Clear, GAO-07-203 (Washington, D.C.: Apr. 6, 2007). 

[3] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 § 
106, 119 Stat. 37-42. Specifically, the statute requires (1) 
individuals to receive budget and credit counseling from an approved 
provider before filing a petition in bankruptcy and (2) bankruptcy 
petitioners to complete an instructional course on personal financial 
management in order to have their debts discharged. For the purposes of 
this statement, hereafter we refer to the prefiling budget and 
counseling requirement as the credit counseling requirement and the 
predischarge personal financial management course as the debtor 
education requirement. 

[4] In this statement, we use the term provider to refer to a provider 
of prefiling credit counseling or predischarge debtor education that 
has been approved by the Trustee Program. References to the Trustee 
Program in this statement refer collectively to the U.S. Trustees and 
the Executive Office for U.S. Trustees. 

[5] Bankruptcy cases in Alabama and North Carolina are not under the 
jurisdiction of the Trustee Program and are administered instead by 
bankruptcy administrators in the judicial districts in those states. 

[6] 11 U.S.C. § 109(h). 

[7] Consumers usually file for bankruptcy under one of two chapters of 
the Bankruptcy Code. Under Chapter 7, the debtor's eligible assets are 
liquidated (reduced to cash) and distributed to creditors in accordance 
with the procedures mandated by the court. Under Chapter 13, debtors 
file a repayment plan with the court agreeing to pay their debts over 
time, usually 3 to 5 years. 

[8] Nonprofit status is a state law concept. The Bankruptcy Act does 
not require that a credit counseling agency be qualified as a 501(c)(3) 
tax-exempt organization in order to be an approved provider. However, 
an organization's federal tax-exempt status is one factor considered by 
the Trustee Program in determining an agency's nonprofit status for 
purposes of being an approved provider. 

[9] Application Procedures and Criteria for Approval of Nonprofit 
Budget and Credit Counseling Agencies and Approval of Providers of a 
Personal Financial Management Instructional Course by United States 
Trustees, 71 Fed. Reg. at 38076 - 38085 (2006). Qualifications for 
credit counseling providers, see 71 Fed. Reg. at 38078 - 38080 (to be 
codified at 28 C.F.R. § 58.15). Qualifications for debtor education 
providers, see 71 Fed. Reg. at 38082 - 38084 (to be codified at 28 
C.F.R. § 58.25). 

[10] OMB No. 1105-0084 (Exp. 12/31/2005), Application for Approval as a 
Nonprofit Budget and Credit Counseling Agency, and OMB No. 1105-0085 
(Exp. 12/31/2005), Application for Approval as a Provider of a Personal 
Financial Management Instruction Course. 

[11] Debt management plans refer to repayment programs offered by some 
credit counseling agencies. Under these plans, consumers pay off their 
unsecured debts by making a single, consolidated payment that the 
agency uses to disburse funds to creditors. 

[12] To qualify for exemption from federal income tax under section 
501(c)(3), an organization must be organized and operated exclusively 
for one or more exempt purposes specified by statute, such as 
religious, charitable, scientific, literary, or educational purposes. 

[13] Because these four agencies were under active examination at the 
time of our review, IRS and the Trustee Program did not provide us with 
the identities of these four providers or information on the status of 
their examinations. 

[14] 11 U.D.C. § 109(h)(1). 

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

[16] Anecdotal evidence we gathered was corroborated by a survey by the 
National Foundation for Credit Counseling of its member agencies 
indicating that about 3 percent of clients who signed up for prefiling 
counseling from October 2005 through August 2006 enrolled in a debt 
management plan. 

[17] Panel trustees and standing trustees are overseen by the Trustee 
Program and administer individual Chapter 7 and Chapter 13 bankruptcy 
cases, respectively. 

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

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

[20] Financial Literacy and Education Commission, Taking Ownership of 
the Future: The National Strategy for Financial Literacy (Washington, 
D.C.: April 2006), pp. 31, 32, and 38. 

[21] The number of bankruptcy filings increased substantially just 
prior to the implementation of the Bankruptcy Act because many 
consumers believed it would be more difficult to receive bankruptcy 
protection once the act went into effect, according to organizations 
representing bankruptcy attorneys and other observers we spoke with. 
Debtors filing for bankruptcy shortly after the implementation of the 
act may therefore not be representative of future debtors. 

[22] For example, see GAO, Program Evaluation: OMB's PART Reviews 
Increased Agencies' Attention to Improving Evidence of Program Results, 
GAO-06-67 (Washington, D.C.: Oct. 28, 2005); Results-Oriented 
Government: GPRA Has Established a Solid Foundation for Achieving 
Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004); and 
Managing for Results: Using GPRA to Assist Congressional and Executive 
Branch Decisionmaking, GAO/T-GGD-97-43 (Washington, D.C.: Feb. 12, 

[23] See 11 U.S.C. § 111(d)(1)(C). 

[24] 71 Fed. Reg. at 38082 (to be codified at 28 C.F.R. § 58.25(f)). 

[25] For example, see GAO, Financial Literacy and Education Commission: 
Further Progress Needed to Ensure an Effective National Strategy, GAO-
07-100 (Washington, D.C.: Dec. 4, 2006) and Highlights of a GAO Forum: 
The Federal Government's Role in Improving Financial Literacy, GAO-05-
93SP (Washington, D.C.: Nov. 15, 2004). 

[26] National Foundation for Credit Counseling, Consumer Counseling and 
Education Under BAPCPA: Year One Report (Silver Spring, Md.: Oct. 16, 
2006). This report provided data on the agencies' average revenue per 
session, which factored in cases where fees were reduced or waived. 
However, the foundation provided us with the underlying data from its 
survey, which we used to determine the average price charged to 
consumers who did not have their fees reduced or waived. 

[27] 71 Fed. Reg. at 38078-79 and 38082-83 (to be codified at 28 C.F.R. 
§§ 58.15(e) and 58.25(j)). 

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