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Bankruptcy Reform: Value of Credit Counseling Requirement Is Not Clear

GAO-07-203 Published: Apr 06, 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.


Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Justice 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.
Closed – Implemented
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.
Department of Justice 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.
Closed – Implemented
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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