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

The Bankruptcy Act requires prefiling credit counseling and debtor  education providers to meet certain requirements designed to ensure the  quality of their services and prevent abusive practices. Few complaints have been raised  about providers’ competence or integrity, although IRS is in the process of  examining the tax-exempt status of four providers. 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. The great majority of  counseling is conducted by telephone or via the Internet rather than in  person. It was intended to help consumers make  informed choices about their options, but anecdotal evidence suggests  that by the time most consumers receive the counseling, their financial  problems are dire and they have few viable alternatives to bankruptcy. Finally, the predischarge debtor education requirement—a  general financial literacy course covering budgeting, money management,  credit, and consumer protection—is believed by most observers we spoke  with to be beneficial. Many Question the Value of the Credit Counseling Requirement, but Data on Outcomes Are Limited

The Conference Report accompanying 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.”  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. However,  formalized guidance could be beneficial because it could, among other  things, set a minimum benchmark for reducing or waiving fees. Trustee Program Has Not Issued Formal Guidance on Determining a Client’s Ability to Pay

As noted earlier, neither the statute nor the Trustee Program’s rulemaking  provide criteria for what constitutes a client’s ability to pay the fee for a  counseling or education session. Supply of Providers Appears Sufficient and Actions Under Way Address Challenges Some Consumers May Face Fulfilling the Requirements

Evidence showed that as of October 2006, enough prefiling credit  counseling and predischarge debtor education providers—153 and 268,  respectively—had been approved to allow consumers to receive these  services on a timely basis. A wide range of participants in the bankruptcy  process—including bankruptcy attorneys, panel trustees, 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. Further, the courts’ recent steps to better ensure that filers are  aware of the prefiling counseling requirement are beneficial given the  potential consequences of filing for bankruptcy without the required  counseling certificate. Recommendations

We recommend that the Attorney General direct the Director of the  Executive Office for U.S. Trustees to do the following:    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. Appendix I: Scope and Methodology

Our report objectives were to examine (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 debtors’  ability to pay; and (4) the availability of approved counseling and  education services, and the challenges debtors may face in receiving these  services.
Why GAO Did This Study

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.

What GAO Found

The Trustee Program's process for approving credit counseling and debtor education providers was designed to help ensure that providers met statutory and program requirements and demonstrated evidence of proficiency, experience, and reputability. The Bankruptcy Act set certain standards for providers, and the program's July 2006 rule clarified these standards and formalized the application review process. As of October 2006, the Trustee Program had approved 153 credit counseling and 268 debtor education providers. These providers have had few formal complaints lodged against them, and federal and state law enforcement authorities with whom we spoke did not identify any recent enforcement actions against them under consumer protection laws. No provider approved by the Trustee Program had had its federal tax-exempt status revoked, although four providers' tax-exempt status was being examined by the Internal Revenue Service. The content of the required credit counseling and debtor education sessions generally complied with statutory and program requirements. Participants in the bankruptcy process largely believed the education requirement--a general financial literacy course--to be beneficial. However, the value of the counseling requirement is not clear. The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet anecdotal evidence suggests that by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options. Because no mechanism currently exists to track the outcomes of the counseling, policymakers and program managers are unable to fully assess how well the requirement is serving its intended purpose. Providers typically charge about $50 per session and evidence suggests fees are being waived as appropriate for clients unable to pay, as the Bankruptcy Act requires. Neither the statute nor Trustee Program guidance defines what constitutes "ability to pay," and policies vary among providers. Formal guidance on this issue would have several benefits, including ensuring compliance with a minimum benchmark for waiving fees. The number of counseling and education providers that have been approved appears sufficient to allow consumers to access these services in a timely manner. In-person sessions are available in most parts of the country, although the great majority of clients fulfill the requirements via telephone or Internet. The Trustee Program has efforts under way to help mitigate the challenges speakers of foreign languages can face in accessing services. Further, the bankruptcy courts have taken steps recently to help better ensure that filers are aware of the potential consequences of filing for bankruptcy without the required counseling certificate.