Bankruptcy Reform
Value of Credit Counseling Requirements Is Not Clear Gao ID: GAO-07-778T May 1, 2007The 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. This testimony is based on GAO's report issued last month, and addresses (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 has 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 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 the counseling sessions, policymakers and program managers cannot fully assess how well the requirement is serving its intended purpose. Providers typically charge about $50 per session, and evidence suggests that 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 standard for waiving fees. The number of approved counseling and education providers appears sufficient to allow consumers to access these services in a timely manner. In-person sessions are not available in certain 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 ensure that filers are aware of the potential consequences of filing for bankruptcy without the required counseling certificate.
GAO-07-778T, Bankruptcy Reform: Value of Credit Counseling Requirements Is Not Clear
This is the accessible text file for GAO report number GAO-07-778T
entitled 'Bankruptcy Reform: Value of Credit Counseling Requirement Is
Not Clear' which was released on May 1, 2007.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Testimony:
Before the Subcommittee on Commercial and Administrative Law, Committee
on the Judiciary, House of Representatives:
United States Government Accountability Office:
GAO:
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-07-778T:
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
strategies.
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.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-777T].
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 jonesy@gao.gov.
[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
standards.
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.
Background:
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
actions.
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
requirement.
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
counselor.
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
recommendations.
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
Skills:
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
Requirements:
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
offered.
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.
FOOTNOTES
[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,
1997).
[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)).
GAO's Mission:
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.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site.
To have GAO e-mail you a list of newly posted products every afternoon,
go to www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548:
Public Affairs:
Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548:
