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entitled 'Bankruptcy Reform: Value of Credit Counseling Requirement Is 
Not Clear' which was released on April 24, 2007. 

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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

April 2007: 

Bankruptcy Reform: 

Value of Credit Counseling Requirement Is Not Clear: 

GAO-07-203: 

GAO Highlights: 

Highlights of GAO-07-203, a report to congressional requesters 

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. 

What GAO Recommends: 

The Department of Justice’s U.S. Trustee Program, which is responsible 
for the new requirements, should (1) develop the capability to track 
and analyze the outcomes of prefiling credit counseling, and (2) issue 
formal guidance on what constitutes a client’s “ability to pay.” The 
Trustee Program agreed with GAO’s recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-203]. 

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

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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

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

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

Supply of Providers Appears Sufficient and Actions Under Way Address 
Challenges Some Consumers May Face Fulfilling the Requirements: 

Conclusions: 

Recommendations: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: Implementation of Counseling and Education Provisions in 
Alabama and North Carolina: 

Appendix III: Comments from the Department of Justice: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Abbreviations: 

FTC: Federal Trade Commission: 
IRS: Internal Revenue Service: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 6, 2007: 

Congressional Requesters: 

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
(Bankruptcy Act) amended the federal bankruptcy code to require (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.[Footnote 1] 
According to the legislative history of the act, one of the goals of 
the prefiling counseling requirement, which became effective on October 
17, 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 recent years, congressional 
committees and federal agencies have investigated some credit 
counseling agencies for alleged unfair and deceptive practices and were 
concerned that these practices, which included steering clients into 
repayment plans that benefited creditors and counseling agencies but 
not necessarily debtors, would affect those filing for bankruptcy 
protection. In addition, some members of Congress and other parties 
have been 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 included in the 
Bankruptcy Act requirements for providers of both credit counseling and 
debtor education courses. The providers must meet certain criteria and 
obtain approval from the Department of Justice's U.S. Trustee Program 
(the Trustee Program), which oversees the bankruptcy process for most 
federal judicial districts and acts to ensure compliance with 
applicable laws and procedures.[Footnote 2] 

In light of these issues, the objectives of this report are 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 clients' ability to pay; and (4) 
the availability of approved counseling and education services and the 
challenges consumers may face in receiving these services. 

To meet these objectives, we reviewed relevant provisions of the 
federal bankruptcy code as amended by the Bankruptcy Act and reviewed 
the Trustee Program's written policies, rules, guidance, and procedures 
for approving credit counseling and debtor education providers. We also 
collected and analyzed data provided to us by the Trustee Program, 
including data on the number, location, and characteristics of 
providers. To determine whether the Internal Revenue Service (IRS) had 
revoked the section 501(c)(3) tax-exempt status under the Internal 
Revenue Code, or taken other enforcement actions, against providers, we 
met with IRS officials and reviewed the agency's publicly available 
information. We also reviewed a nonprobability sample of the Trustee 
Program's application case files for 43 providers that represented the 
majority of counseling and education sessions conducted nationwide. We 
did not do a probability sample because of the limited size of the 
sample we could review and because we wanted to ensure that the small 
sample included all of the largest providers and specific numbers of 
other types of providers. The case files we reviewed included, among 
other things, the providers' initial applications, protocols, curricula 
and other guidance used by counselors and instructors, written 
materials and disclosures provided to consumers, fee schedules, and 
correspondence between the providers and the Trustee Program. To 
facilitate the case file review, we developed a data collection 
instrument to record specific information for each case file reviewed. 
We also reviewed relevant portions of the Federal Rules of Bankruptcy 
Procedure and the standardized forms required by the courts to file a 
bankruptcy petition. Further, we reviewed Web sites of selected 
bankruptcy courts. We also collected information related to the 
prefiling requirement from seven judicial districts and analyzed a 
survey of bankruptcy judges that was conducted by the Federal Judicial 
Center. Finally, we interviewed representatives of the Trustee Program; 
Federal Trade Commission (FTC); IRS; Administrative Office of the 
United States Courts; National Association of Attorneys General; 
American Bankruptcy Institute; National Association of Consumer 
Bankruptcy Attorneys; National Association of Bankruptcy Trustees; 
National Association of Chapter 13 Trustees; trade organizations 
representing creditors, such as the American Bankers Association and 
the Financial Services Roundtable; consumer organizations, such as the 
Consumer Federation of America and the National Consumer Law Center; 
academic researchers; and 10 providers of credit counseling or debtor 
education that had been approved by the Trustee Program. 

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. A more extensive discussion of 
our scope and methodology appears in appendix I. 

Results in Brief: 

The Trustee Program's process for approving credit counseling and 
debtor education providers was designed to ensure that applicants met 
statutory and program requirements and demonstrated evidence of 
proficiency, experience, and reputability. The Bankruptcy Act requires 
that providers meet certain minimum requirements designed to help 
ensure that providers are adequately qualified and to prevent conflicts 
of interest and abusive practices. To implement these requirements, the 
Trustee Program adopted application forms and an interim final rule 
that set forth application procedures and criteria that credit 
counseling and debtor education providers must meet. Relatively few 
concerns have been raised about the competence of the providers 
approved thus far. Federal and state law enforcement officials with 
whom we spoke did not identify enforcement actions related to consumer 
protection issues against any providers subsequent to their approval. 
As of March 2007, no provider approved by the Trustee Program had had 
its federal tax-exempt status revoked, but four providers' tax-exempt 
status was being examined by IRS. A Trustee Program official said that 
the program had approved these four applicants because, after careful 
review, the program was satisfied that they met the statutory and 
program requirements for quality and character. 

Our review of selected providers' application files, curricula, and 
supporting materials showed that the content of the credit counseling 
and debtor education sessions generally complied with statutory and 
Trustee Program requirements. According to the Bankruptcy Act, 
prefiling credit counseling sessions should provide an analysis of the 
client's current financial condition and the factors that led to it, an 
individualized budget analysis, and assistance in developing an 
appropriate action plan. According to providers and Trustee Program 
data, the great majority of debtors fulfill the credit counseling 
requirement by telephone or via the Internet. We did not find evidence 
that agencies that provided prefiling credit counseling discouraged 
clients from filing for bankruptcy and very few clients appeared to be 
entering into repayment plans administered by these agencies. However, 
it is not clear whether the prefiling requirement is serving its 
intended purpose--as described in the Bankruptcy Act's accompanying 
conference report--of helping consumers make an informed choice about 
bankruptcy and its alternatives. Anecdotal evidence suggests that by 
the time most consumers receive the prefiling counseling, their 
financial situations are dire, leaving them with no viable alternative 
to bankruptcy. As we have reported in the past, data on program 
outcomes are essential for appropriate oversight and decision making. 
However, the Trustee Program does not track and monitor the outcomes of 
counseling sessions, including how often they are followed by a 
bankruptcy filing, in large part because this is not required under the 
program's statutory responsibilities. Better data on the outcomes of 
counseling sessions could help program managers and policymakers 
determine how well the prefiling requirement is serving its intended 
purpose. Finally, we found that participants in the bankruptcy process 
and other experts believed that the debtor education course was 
generally a useful tool to improve debtors' financial literacy. 

Although comprehensive data were not available, evidence from our 
review suggests that counseling and education sessions typically cost 
about $50 or less, and industry observers and consumer advocates we 
spoke with generally considered this amount to be reasonable. 
Providers' policies for waiving fees varied and Trustee Program data on 
the three largest providers showed significant variations in the 
proportion of clients whose fees were waived--from 4 percent to 26 
percent for credit counseling sessions and from 6 percent to 34 percent 
for debtor education courses. The Bankruptcy Act requires that 
providers charge reasonable fees and offer their services without 
regard to an individual's ability to pay, but does not specify what 
constitutes a "reasonable" fee or "ability to pay." The Trustee Program 
did not promulgate rules or provide specific guidance about what 
constitutes a debtor's ability to pay in order to give providers the 
flexibility to respond to market conditions. However, formalized 
guidance would help reduce uncertainty among providers about when to 
waive fees and would provide a minimum benchmark for reducing or 
waiving fees. 

Despite initial concerns, enough counseling and education providers 
have been approved to allow consumers to access these services 
relatively easily and in a timely manner. As of October 2006, the 
Trustee Program had approved 153 credit counseling and 268 debtor 
education providers. Three large nationwide organizations represent 
about half of the market for both of these services. In-person 
counseling and education are not readily available in certain parts of 
the country, but even where these services are available, the great 
majority of debtors seek to fulfill the requirements by telephone or 
via the Internet. Anecdotal evidence suggests that certain populations, 
such as those whose primary language is not English, may face 
challenges accessing counseling and education services. The Trustee 
Program is undertaking steps to make it easier to identify providers 
that offer translation services and services in specific foreign 
languages. Some individuals, particularly those not represented by an 
attorney, file bankruptcy petitions without having met the prefiling 
credit counseling requirement. Since the Bankruptcy Act became 
effective, the bankruptcy courts have taken measures--on their Web 
sites and filing forms--to make the prefiling requirement more 
conspicuous to filers. Debtors who fail to fulfill the prefiling 
counseling requirement can face a variety of consequences, such as a 
delay in receiving the automatic stay that prevents creditors from 
continuing to seek payment. 

This report makes two recommendations. First, in order to help 
policymakers assess the value of the Bankruptcy Act's counseling 
requirement, 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. Second, to 
clarify the Bankruptcy Act's requirement that the required counseling 
and education be provided regardless of a client's ability to pay, we 
recommend that the Trustee Program issue formal guidance on what 
constitutes "ability to pay." 

We provided a draft of this report to the Administrative Office of the 
U.S. Courts, Department of Justice, and IRS, which provided technical 
comments that we incorporated as appropriate. In addition, the 
Department of Justice provided written comments, in which it concurred 
with our recommendations and discussed its plans for carrying them out. 

Background: 

Bankruptcy is a court procedure designed to help consumers and 
businesses eliminate debts they cannot pay or repay them with the 
court's protection.[Footnote 3] The filing of a bankruptcy petition in 
most cases operates as an "automatic stay" that essentially prohibits 
most creditors from taking any action to attempt to collect a debt 
pending the resolution of the bankruptcy proceeding. 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. At the end of the process, the debtor's eligible 
debts are discharged, which means that creditors may take no further 
action against the individual to collect the debt. Under Chapter 13, 
debtors file a repayment plan with the court agreeing to pay their 
debts over time, usually 3 to 5 years. In these cases, the debtor's 
discharge occurs upon completion of all payments under the plan. 
Personal bankruptcy is designed to give debtors a "fresh start" but is 
often considered a last resort, in large part because of the adverse 
effect it has on an individual's credit record. Most debtors who file 
for bankruptcy use an attorney, but some debtors represent themselves 
without the aid of an attorney and are referred to as pro se debtors. 

Federal courts have jurisdiction over bankruptcy cases and petitions 
can be filed in any one of the nation's 94 judicial districts.[Footnote 
4] The Trustee Program, a component of the Department of Justice, is 
responsible for overseeing the administration of most bankruptcy cases. 
The program consists of the Executive Office for U.S. Trustees, which 
provides general policy and legal guidance, oversees operations, and 
handles administrative functions, as well as 95 field offices and 21 
United States Trustees--federal officials charged, among other things, 
with supervising the administration of federal bankruptcy cases. The 
Trustee Program also oversees private "panel trustees" and "standing 
trustees" who administer, respectively, individual Chapter 7 and 
Chapter 13 bankruptcy cases. 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. (See app. II for more information on Alabama 
and North Carolina.) 

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 the addition of new credit counseling and 
debtor education requirements.[Footnote 5] 

* 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. 

The Bankruptcy Act has 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. Upon completing prefiling 
counseling or predischarge education, consumers get a certificate from 
the provider that is submitted to the bankruptcy court as evidence of 
having fulfilled the requirement. 

The credit counseling industry has existed for about 40 years. 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. These agencies have historically been community-based 
nonprofit organizations that charge nothing or solicit modest fees from 
clients to help defray expenses. In some cases, agencies may offer to 
put clients in repayment programs, commonly termed debt management 
plans, where consumers pay off their unsecured debts by making a 
single, consolidated payment that the agency uses to disburse funds to 
creditors. Under such plans, creditors often agree to reduce the 
debtor's interest rates or waive certain fees and to contribute a small 
percentage of the amount received to the counseling agency to help fund 
its expenses. 

The FTC and others have noted that many credit counseling agencies 
operate honestly and fairly and that these agencies are professional 
operations that provide valuable services to financially distressed 
consumers. However, starting in the 1990s, consumer complaints about 
selected segments of the credit counseling industry spurred 
congressional hearings and federal and state investigations into the 
activities of many credit counseling agencies.[Footnote 7] For example, 
over the past few years, the FTC has settled enforcement actions 
against several of these agencies for alleged abusive practices, 
including steering consumers into debt management plans that provided 
financial benefits to the agency but not to the consumer.[Footnote 8] 
Further, as part of its Credit Counseling Compliance Project, IRS has 
undertaken a broad examination effort of credit counseling 
organizations for compliance with the Internal Revenue Code, including 
the propriety of the organizations' tax-exempt status.[Footnote 
9],[Footnote 10] Between January 2005 and March 2007, IRS had revoked 
or terminated the federal tax-exempt status of 19 credit counseling 
agencies, and as of March 2007, IRS had proposed revocations for an 
additional 28 agencies.[Footnote 11] 

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. The Trustee 
Program adopted application forms and an interim final rule on 
procedures for approving applicants. 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. 

Agencies Must Meet Statutory and Trustee Program Requirements to Be 
Approved: 

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. 
With regard to credit counseling, the Trustee Program may approve only 
entities that, among other things: 

* are nonprofit organizations;[Footnote 12] 

* have an independent board of directors with the majority of members 
not directly or indirectly benefiting financially from the outcome of 
the counseling services; 

* charge a reasonable fee for counseling services; 

* provide full disclosure to a client on certain prescribed items; 

* provide for the safekeeping and payment of client funds, including 
auditing the trust accounts annually and bonding employees; 

* provide trained counselors with adequate experience; and: 

* have adequate financial resources to provide continuing support 
services for budgeting plans over the life of any repayment plan. 

The act required the Trustee Program to undertake a thorough review of 
the qualifications of a credit counseling agency before approving it to 
provide prefiling counseling services. Providers are initially approved 
for a probationary period not to exceed 6 months; at the conclusion of 
this period, they must reapply and the Trustee Program can approve them 
for an additional 1-year period. In July 2006, the Trustee Program 
adopted an interim final rule that set forth application procedures 
designed to ensure that only organizations that met the minimum 
qualification standards set forth in the Bankruptcy Act would be 
approved to provide services.[Footnote 13] The rule established 
criteria by which the Trustee Program will evaluate whether applicants 
have satisfied the statutory standards. For example, the rule specified 
factors that indicate whether an applicant will be providing counselors 
with adequate training and experience.[Footnote 14] The rule also 
established procedures permitting the Trustee Program to remove 
agencies from the approved list, including an administrative review 
process before removal.[Footnote 15] 

As with credit counseling providers, the Bankruptcy Act also 
established minimum qualification standards for debtor education 
providers. For example, the act stated that these entities must provide 
personnel with adequate experience and training and use appropriate 
learning materials and teaching methodologies. The act also required 
that the provider have adequate facilities in reasonably convenient 
locations or, alternatively, provide instruction by telephone or 
through the Internet. Debtor education providers also must keep records 
to permit evaluation of a course's effectiveness. The act does not 
require debtor education providers to be nonprofit entities. The 
Trustee Program's interim final rule set forth application procedures 
and specified the certification standards for an agency's instructors, 
established course procedures and recordkeeping requirements, and 
identified the topics that the courses must include.[Footnote 16] 

The Trustee Program Developed an Approval Process Designed to Help 
Ensure Compliance with Statutory and Program Requirements: 

The Trustee Program established the Credit Counseling and Debtor 
Education Unit in June 2005 to implement the relevant provisions of the 
Bankruptcy Act, which went into effect in October 2005. Because the 
Trustee Program had no prior experience or expertise in this area, the 
unit sought input from a wide variety of stakeholders, including state 
and federal agencies, credit counseling representatives, consumer 
advocates, and academics. In June 2005, the unit developed application 
forms and procedures and a basic process for approving 
providers.[Footnote 17] 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 used to evaluate the 
agencies' qualifications. Among the information that applicants are 
required to disclose is: 

* names and other data on current and former officers, directors, and 
trustees, including whether any have been convicted of certain crimes; 

* data on the agency, including how long it has been in business, the 
number of clients it has served, and relevant licenses, accreditations, 
and association memberships; 

* revocations of licenses or accreditations, legal actions and 
investigations, and disciplinary or enforcement actions; 

* audited financial statements for the previous 2 years for applicants 
that offer debt management plans; 

* nonprofit status, including any correspondence with IRS related to 
section 501(c)(3) tax-exempt status; 

* information on the nature and content of the credit counseling 
services provided, such as the average length of a session; 

* written materials, such as handouts and protocols, used in providing 
credit counseling services; and: 

* information on debt management plans serviced by the agency. 

To understand and assess the Trustee Program's process for reviewing 
applications for credit counseling and debtor education, we conducted a 
detailed review of the case files of 32 applications that had been 
approved and 11 applications that had been denied.[Footnote 18] Our 
case file review 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. In reviewing applications, 
analysts in the Counseling and Debtor Education Unit used a checklist 
to ensure that each applicant satisfied the statutory and application 
requirements and had provided documented evidence to show sufficient 
experience, qualifications, and proficiency. In many cases, applicants 
had to provide additional information. The Trustee Program also 
required some applicants to make modifications to their programs or 
processes before approving the application. For example, in several 
cases we reviewed, applicants were required to add additional material 
to the disclosure statements provided to clients. In another case, an 
Internet-based counseling provider was required to ensure that its 
counseling sessions added opportunities for direct interaction between 
the debtor and a counselor. 

The Trustee Program's review process also includes measures to evaluate 
the applicants' character and standing in the credit counseling 
industry. For example, Trustee Program officials told us that they 
consult publicly available information, such as the Web site of the 
Better Business Bureau, and conduct an Internet search on applicants 
for information on their character and corroboration of information 
submitted. In addition, higher-risk applicants are evaluated more 
rigorously. For instance, 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. As of October 
2006, the Trustee Program had rejected 96 applications to provide 
credit counseling or debtor education services. In most of the cases we 
reviewed where the applicant was rejected, it had not provided 
sufficient documentation to demonstrate its nonprofit status, the 
existence of an independent board of directors, or its ability to 
perform adequate counseling. In addition, as of October 2006, 123 
applications were withdrawn before being approved or rejected. Thus, 
according to the Trustee Program, out of 680 original applications, 64 
percent had been approved by the Trustee Program, 32 percent had been 
either rejected or withdrawn, and 4 percent were still in the process 
of being reviewed. 

During the period between July 2005 and January 2007, approval of 
credit counseling and debtor education applications took an average of 
about 7 weeks from the time they were submitted, according to 
information provided by the Trustee Program. In some cases, the 
approval of an application can be lengthy--38 weeks in one instance--in 
part because applicants often are asked to provide additional 
information. Some providers we spoke with said they believed that the 
review process could have been more streamlined--for example, one 
provider told us it was asked to provide the same information twice. A 
Trustee Program official noted that the credit counseling and debtor 
education requirement was still relatively new and the program is 
continuing its efforts to streamline and improve the application 
process. 

Trustee Program officials told us they are currently developing 
procedures for conducting audits of selected providers that have been 
approved for credit counseling or debtor education. These audits, known 
as Quality Service Reviews, are expected to include on-site inspections 
that will examine, among other things, the quality of providers' 
services and compliance with statutory and program requirements. 

Few Complaints Raised about Providers' Competence or Integrity, 
although IRS Is Examining the Tax-Exempt Status of Four Providers: 

As of October 2006, the Trustee Program had approved 153 credit 
counseling providers. As required by statute, all of the credit 
counseling providers were nonprofit organizations, and about 94 percent 
of them had tax-exempt status under section 501(c)(3) of the Internal 
Revenue Code. While some of the approved agencies were relatively new 
organizations, about 90 percent had more than 5 years of experience 
conducting credit counseling. The three largest credit counseling 
providers--Consumer Credit Counseling Services of Greater Atlanta, 
GreenPath Debt Solutions, and Money Management International-- 
represented more than half of all prefiling credit counseling 
certificates issued nationwide between January and October 2006. Many 
of the approved counseling agencies were members of the National 
Foundation for Credit Counseling, which industry participants told us 
is regarded as having high membership standards. In addition, many of 
these providers were accredited by the Council on 
Accreditation.[Footnote 19] 

The Trustee Program had also approved 268 debtor education providers as 
of October 2006. Many of these providers also provided credit 
counseling services and the largest three provided almost half of all 
debtor education sessions nationwide. As of March 2006, about one-third 
of the debtor education providers had tax-exempt status under section 
501(c)(3) of the Internal Revenue Code. Several Chapter 13 trustees-- 
individuals appointed by United States trustees to administer 
bankruptcy cases--were approved to provide debtor education, as were 
some educational institutions, such as community colleges. 

Complaints Have Been Limited: 

As noted earlier, prior to the implementation of the Bankruptcy Act, 
concerns had been raised that debtors required to receive prefiling 
credit counseling could be exposed to unfair and deceptive practices by 
unscrupulous agencies. However, 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 providers subsequent 
to their approval. [Footnote 20] 

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.[Footnote 21] Half of these 
complaints were made by bankruptcy attorneys, while about one-quarter 
were made by consumers and one-quarter by service providers, bankruptcy 
courts, and others. Our review of a selection of complaints found that 
the Trustee Program took action to assess and follow up on each 
complaint, including notifying the relevant provider and asking for a 
response to the allegation. Providers typically gave the Trustee 
Program a detailed reply and documentation related to the alleged 
complaint. For example, one provider offered information based on a 
tape recording of the counseling session in question. 

Our analysis found that the many of the complaints were related to 
administrative issues, such as the timely issuance of a debtor's 
certificate or the status of a provider's license. In addition, 20 
complaints alleged unfair or inappropriate practices by providers. 
These included cases where providers were accused of giving legal 
advice, discouraging customers from filing for bankruptcy, or failing 
to inform clients of the possibility of a fee waiver. In many cases, 
the provider offered evidence that satisfied the Trustee Program that 
the complaint was without merit. In a few cases, the provider 
acknowledged to the Trustee Program that the complaint had merit and 
responded accordingly--for example, refunding a fee to a client or 
implementing additional procedures to ensure staff compliance with 
relevant policies. In no case did a complaint result in the Trustee 
Program removing a provider from the approved list, according to a 
program official. 

IRS Is Examining Four Providers Approved by the Trustee Program: 

As noted earlier, IRS has put credit counseling organizations under 
additional scrutiny in recent years. As part of its Credit Counseling 
Compliance Project, which began in October 2003, the agency began 
examinations of 63 credit counseling agencies, which at the time 
represented more than half of the industry's revenue. The examinations 
focused on whether the agencies were charitable organizations meeting 
the requirements for tax exemption under section 501(c)(3) of the 
Internal Revenue Code.[Footnote 22] As of March 2007, IRS had completed 
examinations of 47 credit counseling agencies and in all cases the 
completed examinations resulted in either revocation, proposed 
revocation, or other termination of tax-exempt status. According to a 
May 15, 2006, IRS press release, the revocations occurred because these 
organizations did not provide the level of public benefit required to 
qualify for tax exemption. The agency stated that many of these 
agencies served primarily to get clients into debt management plans, 
offered little or no counseling or education, and appeared to be 
motivated mostly by profit. In many cases, IRS stated, these agencies 
also served the private interests of related for-profit businesses, 
officers, and directors. 

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 it was aware of these 
examinations at the time that it approved these applicants, but had 
determined that the four agencies met the statutory and program 
requirements despite the IRS scrutiny.[Footnote 23] 

The Trustee Program can receive information about a provider's tax 
status through several mechanisms. As part of its process of reviewing 
applications and reapplications, a Trustee Program official told us 
that the program consults publicly available information from IRS or 
the applicable state to confirm the applicant's nonprofit status. As 
noted earlier, the program's application forms also require that new 
applicants--as well as current providers seeking their annual 
reapproval--disclose any audit or investigation by IRS or other federal 
or state agency. In addition, the interim final rule requires that 
providers, once approved, promptly notify the Trustee Program of any 
circumstances that would materially change a response to any section of 
the application, which, according to a Trustee Program official, would 
include the initiation of an IRS investigation.[Footnote 24] The 
interim final rule also requires that providers notify the program 
immediately if IRS cancels or terminates their tax-exempt 
status.[Footnote 25] Applicants and providers are required to submit, 
upon request, a written waiver authorizing the Trustee Program to 
obtain confidential information about the agency from IRS.[Footnote 26] 
Program officials told us they have used such waivers in several cases 
to get information on whether a provider is under examination by IRS 
and the status of the examination process. The waiver also gives the 
program access to any proposed or final revocation letter from IRS to a 
provider. 

A Trustee Program official told us that when the program learns that an 
applicant is under examination by IRS, the program obtains and reviews 
correspondence between the applicant and IRS in order to understand the 
basis for the examination. For example, the proposed revocation letter 
includes the reasons why IRS seeks to revoke the agency's tax-exempt 
status. In addition, the Trustee Program official said that 
applications of agencies under IRS examination receive additional 
scrutiny related to their use of debt management plans and potential 
conflicts of interest. As noted earlier, a Trustee Program official 
told us the program had approved the four applicants under IRS 
examination because after careful review it was determined that the 
applicants met statutory and program requirements. 

The official also noted that IRS may determine that a credit counseling 
agency is not tax exempt under section 501(c)(3) because it does not 
have an exclusively charitable or educational purpose, but such a 
finding would not necessarily preclude the applicant from meeting the 
statutory or program requirements for becoming an approved provider. 
Although the statute requires credit counseling providers to be 
nonprofit organizations, it does not require that they be tax exempt 
under section 501(c)(3).[Footnote 27] The interim final rule does allow 
the Trustee Program to immediately remove a credit counseling agency 
from the approved list if IRS revokes the agency's tax-exempt 
status.[Footnote 28] A Trustee Program official told us that this 
provision was intended to protect consumers in cases where IRS's 
revocation is based on conduct that raises questions about the 
integrity of the provider. A program official told us that should IRS 
revoke an agency's tax-exempt status, the program would carefully 
review the reasons for the revocation and take whatever actions were 
appropriate. 

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

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. The great 
majority of counseling is conducted by telephone or via the Internet 
rather than in person. 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 questioned the 
value of the prefiling credit counseling requirement. 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. The Trustee Program does not track and 
monitor the outcomes of counseling sessions because it is not required 
to by statute, but such data would be useful in determining whether the 
counseling requirement is meeting its intended goal. 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. 

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 29] 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. The Trustee Program's interim final rule indicated 
that counseling sessions should average 60 to 90 minutes in length and 
prohibited credit counselors from providing debtors with legal advice, 
unless otherwise authorized by law.[Footnote 30] The Trustee Program 
has not published additional formal guidance or instruction about the 
nature or content of the counseling session. 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 have 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. In general, the different 
providers had similar curricula and materials, although some providers 
covered certain topics more thoroughly than others. For example, some 
providers included more detailed discussions of topics such as 
modifying spending habits, avoiding identity theft, or negotiating with 
creditors. Credit counseling sessions generally began with providers 
collecting data on the client's finances, including sources and amount 
of income, debt, and expenses. In some cases, providers received some 
of this information from the client in advance via the Internet or from 
the client's credit report. 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. Although counselors are prohibited from 
giving legal advice or recommending whether or not clients should file 
for bankruptcy, some providers describe the advantages and 
disadvantages of each alternative. When the session is over, the 
counselor issues a certificate verifying that the client has completed 
the prefiling credit counseling requirement. 

Most Credit Counseling Is Conducted by Telephone or Internet: 

Although most providers offer clients the option of conducting credit 
counseling sessions in person, available data indicate the great 
majority of debtors fulfill 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 31] Similarly, a survey by the National Foundation 
for Credit Counseling of its member agencies that conduct prefiling 
counseling found that between October 17, 2005, and August 31, 2006, 61 
percent of their sessions were conducted by telephone, 24 percent via 
the Internet, and 15 percent in person. 

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. While some 
providers noted that counseling conducted face-to-face can be 
beneficial when addressing more complex financial situations, other 
providers and industry participants noted that telephone counseling may 
allow clients more convenience and flexibility and may be easier for 
people with mobility problems, such as the elderly. A recent study by 
Georgetown University's Credit Research Center found no significant 
difference in the outcomes of credit counseling sessions conducted by 
telephone or in person.[Footnote 32] Specifically, the study found that 
clients receiving in-person and telephone counseling had similar risks 
of bankruptcy or credit problems 2 years later. Our review of materials 
used to facilitate credit counseling sessions indicated that they 
generally had the same content and structure regardless of whether they 
were delivered in person, by phone, or via the Internet. 

To receive prefiling credit counseling via the Internet, 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. Providers told us that after completing 
the Internet portion of the counseling session, the client could speak 
with a counselor by telephone or, in some cases, via Web chat. During 
these one-on-one communications, which one provider told us typically 
last 10 to 20 minutes, counselors reviewed the budget analysis with the 
client and answered any questions. The Trustee Program also requires 
providers to have procedures to effectively verify their clients' 
identity. We did not identify any significant research on the 
effectiveness of credit counseling facilitated via the Internet. The 
Trustee Program told us that it has contracted with the RAND 
Corporation to review the comparative effectiveness of credit 
counseling delivered via telephone, Internet, and in person. A report 
from RAND is expected to be issued by July 2007. 

Available Evidence Indicates That Prefiling Credit Counseling Results 
in Few Debt Management Plans: 

The Bankruptcy Act includes provisions designed to help ensure that 
credit counseling sessions provide objective information and present 
the client with alternatives in a neutral manner. For example, the act 
requires that counseling providers be nonprofit entities with 
independent boards of directors and prohibits counselors from receiving 
commissions or bonuses based on the outcomes of the counseling 
sessions. Despite these provisions, some consumer advocacy groups, 
policymakers, and others expressed concerns that credit counseling 
provided under the Bankruptcy 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 receiving prefiling credit counseling have entered into any 
debt management plan. Counseling providers and representatives of 
bankruptcy attorneys we spoke with generally estimated that fewer than 
2 percent of prefiling credit counseling clients entered debt 
management plans. Further, a survey by the National Foundation for 
Credit Counseling of its member agencies indicated that about 3 percent 
of clients who signed up for prefiling counseling from October 2005 
through August 2006 enrolled in a debt management plan. In general, 
representatives of consumer groups, panel trustees, and others told us 
that they had not observed cases in which clients receiving prefiling 
credit counseling had been inappropriately encouraged to enter debt 
management plans or avoid filing for bankruptcy. As of October 2006, 
the Trustee Program had received five formal complaints (out of more 
than 650,000 credit counseling certificates issued) alleging that 
providers made harmful or inappropriate recommendations. Our review of 
the documentation associated with these five complaints indicated that 
in each case the provider gave the Trustee Program a comprehensive 
response. In each of these five cases, the program was satisfied that 
either the complaint lacked merit or the provider had taken appropriate 
steps to remediate the problem. 

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." [Footnote 33] 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 34] 

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 we spoke with-- 
including representatives of federal agencies, bankruptcy attorneys, 
and panel trustees; 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 the use of 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 start, to avoid potential bankruptcy.[Footnote 35] 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 of their homes. As such, anecdotal evidence indicates that 
the great majority of clients receiving prefiling counseling have few 
viable alternatives to bankruptcy.[Footnote 36] 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 track how many 
consumers who receive credit counseling subsequently file for 
bankruptcy within the 180 days during which the certificates may be 
used. Similarly, little is known about the alternatives chosen by those 
consumers who do not file for bankruptcy or how the credit counseling 
affects their decisions.[Footnote 37] 

During roughly the first half of 2006, some 381,005 counseling 
certificates were issued and 263,408 bankruptcy petitions 
filed.[Footnote 38] However, this information on its own does not 
provide a reliable estimate of how many consumers who received 
counseling subsequently filed for bankruptcy, for several reasons. 
First, in cases that involve a husband and wife filing a joint 
bankruptcy petition, each must obtain counseling and be issued a 
certificate. Second, a time lag may exist between the time the 
certificate is issued and the time of the filing, because the 
certificate is good for 180 days. For this reason, reported bankruptcy 
filings during a given time frame will not reflect all the bankruptcies 
that will be filed using the certificates issued in that time frame. 
Third, certificates are sometimes cancelled and reissued for 
administrative reasons (such as the misspelling of the client's name), 
so that one person is issued two certificates. Finally, occasionally a 
client may receive prefiling credit counseling but not be issued a 
certificate--for example, if the client decides not to file for 
bankruptcy. 

When a provider completes a prefiling credit counseling session, it 
uses a Web-based system operated by the Trustee Program to issue the 
client a certificate, which includes a unique certificate number. While 
the Trustee Program maintains a list of certificate numbers, for 
privacy purposes it does not receive any information, including names, 
about the clients who were issued certificates. A bankruptcy petitioner 
must provide to the court a certificate to document having satisfied 
the prefiling counseling requirement. However, the courts do not track 
or report the unique numbers assigned to these certificates. As a 
result, it is not possible to link individuals who have received 
prefiling credit counseling with individuals who have filed for 
bankruptcy. 

A Trustee Program official told us that the program had not taken steps 
to track and monitor the outcomes of credit counseling sessions because 
this effort was not part of its statutory responsibilities. The 
Bankruptcy Act, he noted, requires the Trustee Program to test and 
evaluate the effectiveness of a pilot debtor education curriculum, but 
contains no analogous provisions for monitoring or evaluating credit 
counseling.[Footnote 39] As we have reported in the past, meaningful 
data on program outcomes and costs are essential for appropriate 
oversight and decision making.[Footnote 40] Without reliable data on 
the outcomes of the prefiling credit counseling sessions, policymakers 
and program managers lack information that would allow them to 
determine how well the statutory requirement is truly serving to inform 
consumers about their options. 

Debtor Education Sessions Are Designed to Offer Financial Management 
Skills: 

The Bankruptcy Act describes the debtor education requirement as an 
"instructional course concerning personal financial management" that 
could be offered in person, by telephone, or via the Internet.[Footnote 
41] The Trustee Program's interim final rule specified that the course 
should average 2 hours in length and include written information and 
instruction on four major topics: 

* budget development, which includes, calculating income, identifying 
and classifying monthly expenses, and setting short-term and long-term 
goals; 

* money management, which includes keeping adequate financial records, 
developing decision-making skills to distinguish between wants and 
needs, comparison shopping, maintaining appropriate levels of 
insurance, and saving for emergencies; 

* wise use of credit, which includes understanding the types, sources, 
and costs of credit and loans; identifying debt warning signs; using 
credit appropriately and identifying alternatives to credit; and 
checking a credit rating; 

* consumer information, including public and nonprofit resources for 
consumer assistance and applicable consumer protection laws and 
regulations.[Footnote 42] 

In reviewing the debtor education curricula, teaching guides, and other 
materials of 17 debtor education providers, we found that the content 
included the topics and elements that the Trustee Program required. In 
general, we found the curricula of different providers to be fairly 
similar, although some providers included additional details or 
emphasis on certain topics. According to a Trustee Program official, to 
cover the required topics, most of the debtor education providers used 
1 of about 15 standard curricula--for example, the National Foundation 
for Credit Counseling's "Live a Richer Life" or the Federal Deposit 
Insurance Corporation's "Money Smart." 

The Bankruptcy Act required that the Trustee Program, after consulting 
with a wide range of experts in the field, also develop its own 
curriculum and training materials for debtor education. The act 
required the program to test the effectiveness of this curriculum and 
materials for 18 months in six judicial districts.[Footnote 43] In 
September 2005, the Trustee Program contracted with the Education 
Development Center, a nonprofit research firm, to develop the pilot 
curriculum and with Abt Associates, a private consulting firm, to 
evaluate it. The curriculum, entitled "Financial Education: Principles 
and Practices," was presented by academic institutions in the six 
judicial districts selected for the pilot and was still being evaluated 
as of March 2007.[Footnote 44] 

Trustee Program data collected on certificates issued between July 11 
and October 17, 2006, indicated that 50 percent of predischarge 
education sessions was conducted by Internet, 29 percent was conducted 
via telephone, and 21 percent was conducted in person. In-person debtor 
education courses are typically conducted in a group classroom setting, 
while telephone sessions are conducted in one-on-one or group settings. 
For Internet sessions, the client generally reads the educational 
material and takes an on-line quiz, and then may have a follow-up 
discussion with an instructor. The Trustee Program does not require 
that debtor education conducted via the Internet include individual 
communication with a counselor, but a counselor must be made available 
to answer any questions clients may have. 

Most representatives of consumer groups, panel trustees, bankruptcy 
attorneys, and others we spoke with believed that the predischarge 
debtor education course was likely to help improve consumers' financial 
literacy. They noted, for example, that consumers completing bankruptcy 
should receive guidance on budgeting, avoiding future debt, and 
rebuilding credit. The National Association of Chapter 13 Trustees 
established a similar debtor education course several years before the 
Bankruptcy Act took effect. According to representatives of Chapter 13 
trustees, these courses were particularly helpful for debtors under 
Chapter 13 bankruptcy protection, who operate under a repayment plan 
for up to 5 years, and debtors who took the course were more likely to 
successfully complete their repayment plans.[Footnote 45] 

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

The Bankruptcy Act requires that providers charge reasonable fees and 
provide their services without regard to a client's ability to pay. 
Neither the statute nor the Trustee Program's interim final rule 
provide specific criteria for what constitutes a "reasonable fee" or 
"client's ability to pay." Available evidence indicates that credit 
counseling and debtor education sessions typically cost about $50 or 
less, an amount that representatives of consumer groups, legal 
organizations, and others we spoke with generally believed to be 
reasonable. Providers varied in their policies and practices for 
waiving fees. The Trustee Program has not issued rules or specific 
guidance on what constitutes a debtor's ability to pay because it 
wanted to give providers the flexibility to respond to market 
conditions. However, formalized guidance could be beneficial because it 
could, among other things, set a minimum benchmark for reducing or 
waiving fees. 

Providers Must Charge Reasonable Fees and Provide Services Regardless 
of Clients' Ability to Pay: 

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 the 
fee.[Footnote 46] However, the statute did not specify what fees are 
considered "reasonable" nor what constitutes a client's "ability to 
pay." Before the Bankruptcy Act came into effect, the Trustee Program 
noted on its Web site that based on information provided by the 
industry, it believed that credit counseling would generally be 
available for a fee ranging from free to $50. The site also noted that 
a number of variables may affect an agency's fee structure, including 
geography, types of services provided, administrative costs, and the 
presence of alternate funding sources. The Trustee Program said that in 
determining whether fees were reasonable, it would consider these 
factors as well as the fees customarily charged in the industry for 
similar services. The site did not provide information about the 
expected fees for debtor education. 

In its interim final rule, adopted in July 2006, the Trustee Program 
did not provide specific guidance on what dollar amount would 
constitute a reasonable fee nor the criteria providers should use in 
determining a client's ability to pay. A Trustee Program official told 
us that in addition to the program's publicly available guidance, it 
has provided informal feedback to providers who have inquired about the 
appropriateness of their fee structures. The Trustee Program requires 
that providers 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 47] The official told us that the program reviews 
providers' waiver policies during the application process to ensure 
that the policies are clear and objective, and in some cases have 
rejected applicants for inadequate fee waiver policies. The interim 
final rule specified that providers must advise clients of their fee 
schedules before services are rendered and inform them that services 
are available for free or at a reduced rate based on their ability to 
pay. It also prohibited providers from charging a separate fee for 
issuing the counseling and education certificates. 

While Providers' Fees Are Considered Reasonable, Fee Waiver Policies 
Vary: 

The Trustee Program requires providers to report in their applications 
and reapplications the fees that they charge, although the program does 
not track these data centrally. Trustee Program staff, providers, and 
trade association representatives told us that most providers charge 
around $50 each for their credit counseling and debtor education 
sessions. This estimate was corroborated in survey data collected by 
the National Foundation for Credit Counseling from 107 providers, which 
reported charging an average fee of $47 for prefiling credit counseling 
and $43 for debtor education.[Footnote 48] In addition, each of the 
three largest providers, which as of October 2006 had issued about half 
of all certificates, told us that they charged exactly $50 for an 
individual credit counseling or debtor education session. Among the 
smaller credit counseling providers we spoke with, two told us that 
they charged $50, and the others charged $49, $35, and $0. Among debtor 
education providers we spoke with, fees ranged between $0 and $50 per 
individual session. In a few cases, we identified smaller counseling 
and education providers whose fees were higher, such as $75 per 
session. Representatives of consumer groups and legal organizations, as 
well as academics and others we spoke with, generally said they 
believed that the fees charged by credit counseling and debtor 
education providers had been reasonable. Some providers said that the 
fees had generally been adequate to cover their costs, but others said 
that prefiling counseling was being subsidized by their other lines of 
business. Providers noted that the requirements were still relatively 
new and that as the true cost of providing these services in the long 
term became clearer, they might consider adjusting their fees. 

Providers have varying policies for determining a client's ability to 
pay the fee. In September 2005, the National Foundation for Credit 
Counseling, after consulting with the Trustee Program, told its members 
that the program said it would be appropriate to waive counseling fees 
for clients with incomes less than 150 percent of the poverty line--the 
same eligibility threshold authorized by federal law for waiving the 
fees charged by the court for filing a bankruptcy petition.[Footnote 
49] Some providers we interviewed used as their threshold a different 
percentage of the poverty line or other criteria, such as whether the 
client received legal aid or disability benefits. The three largest 
providers all use 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. A Trustee Program official told us 
that three factors were responsible for the differences in the 
proportions of clients whose fees were reported waived. First, 
providers had different policies for determining ability to pay. 
Second, some providers chose to waive fees for some clients who did not 
qualify under the provider's formal policy. Third, providers were 
inconsistent in how they reported fee waiver data to the Trustee 
Program--for example, some providers counted as waivers cases in which 
clients were charged the fee but failed to pay. 

Some policymakers and consumer groups have expressed concerns that 
providers might not always clearly inform clients that fees could be 
waived for those unable to pay. Stakeholders involved in the process 
told us that there had been limited anecdotal evidence to support this 
concern. In addition, out of more than 930,000 credit counseling or 
debtor education certificates issued as of October 2006, the Trustee 
Program had received only seven formal complaints about providers that 
had not waived fees or told clients about this option. Trustee Program 
officials noted that nearly all complaints related to fees and fee 
waivers were made shortly after the Bankruptcy Act went into effect and 
the requirements were new. 

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. Some providers told 
us that the lack of guidance left them unsure about the criteria they 
should use. Eight of the 22 comments to the interim final rule 
submitted by providers, industry associations, and consumer groups 
requested that the Trustee Program provide guidance or clarification on 
what constitutes a client's ability to pay. In some cases, the comments 
suggested that the program provide objective measures or uniform 
criteria. Several providers we spoke with, as well as trade 
associations, consumer groups, and creditor organizations, also told us 
that additional guidance on determining ability to pay would be 
beneficial. 

Trustee Program officials told us that they are considering formalizing 
criteria, in a rulemaking, that providers should use to determine 
clients' ability to pay but that they have not made a final decision on 
the issue. Program officials told us that they were reluctant to 
formalize such criteria because they did not want to be too 
prescriptive and wanted to give providers flexibility to respond to 
market conditions--for example, to adjust fee waiver policies based on 
local economic conditions and costs of doing business. However, clearer 
guidance on determining a client's ability to pay could have several 
benefits. First, it could reduce uncertainty among providers as to what 
criteria are appropriate. Second, it could improve transparency by 
clarifying the minimum standards for waiving or reducing fees. Finally, 
it could help ensure that services are offered to clients regardless of 
ability to pay by providing guidelines for a minimum benchmark on when 
fees should be reduced or waived. 

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. Although in-person counseling or education 
is not easily accessible in some parts of the country, these services 
are available via telephone or Internet, and most debtors favored these 
options. Many providers offer services in several languages or provide 
translation services. Anecdotal evidence suggests that consumers who 
try to file for bankruptcy without an attorney sometimes are not aware 
of the credit counseling requirement. A survey of federal bankruptcy 
judges conducted by the Federal Judicial Center indicated that debtors 
who file for bankruptcy without fulfilling the credit counseling 
requirement can face a variety of consequences. 

Enough Counseling and Education Services Exist to Meet Demand: 

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 as of October 2006 the supply of 
credit counseling and debtor education services had been adequate to 
meet the demand for these services. 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. 

When the Bankruptcy Act went into effect in October 2005, the Trustee 
Program had approved 71 credit counseling and 76 debtor education 
providers. As of October 2006, this number had risen to 153 credit 
counseling and 268 debtor education providers. The three largest 
organizations provide about 56 percent of the credit counseling 
sessions and about 46 percent of the debtor education sessions. While 
the majority of providers are local organizations offering services in 
particular communities, about a dozen offer services nationwide, either 
through a network of field offices or through telephone or Internet 
services. Because the great majority of debtors fulfill the credit 
counseling and debtor education requirements through sessions provided 
by telephone or via the Internet, having providers nearby is not always 
necessary. 

A wide range of participants we spoke with told us that consumers who 
call to schedule a credit counseling or debtor education session can 
usually be accommodated within 24 hours, and sometimes much sooner. 
Providers sometimes refer potential clients to another provider if they 
cannot see a client in a timely manner. The providers we spoke with, 
which represented the great majority of certificates issued, told us 
that they currently had adequate capacity to meet demand for their 
bankruptcy-related services. At the same time, the volume of bankruptcy 
filings has been relatively low since the Bankruptcy Act became 
effective and the capacity of providers could potentially become an 
issue should bankruptcy filings substantially increase in the future. 
However, several large providers told us they would be able to expand 
their capacity if needed. 

In-Person Counseling Is Not Always Available, but Few Seek It: 

Nearly all approved credit counseling and debtor education providers 
offer their clients the option of in-person sessions. As of July 2006, 
consumers could receive prefiling credit counseling in person at more 
than 700 locations and debtor education in person at more than 1,000 
locations. Comprehensive data do not exist on the precise proportion of 
consumers living close enough to agencies providing in-person 
counseling or education to comfortably travel to such a site. However, 
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. For example, judicial districts had, 
on average, 8 locations where consumers could fulfill the credit 
counseling requirement and 11 where they could meet the debtor 
education requirement via an in-person session. But some large judicial 
districts, such as those in Alaska, North Dakota, and Wyoming, had 5 or 
fewer such locations. No in-person locations existed for credit 
counseling in the district encompassing Southern Illinois, nor was in- 
person debtor education available in the District of Columbia. 

Some providers we spoke with said that they had not expected that there 
would be so little demand for in-person prefiling credit counseling and 
predischarge debtor education services, pointing out that, by contrast, 
more than half of their traditional credit counseling sessions were 
conducted in person. Because of the low demand for in-person prefiling 
counseling, one large provider told us that it had reallocated some of 
its resources--for example, by closing some local offices and expanding 
call centers that provide telephone 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. As noted 
earlier, by the time most debtors receive the counseling, they have 
already consulted an attorney and decided to seek bankruptcy protection 
and see the counseling and education sessions largely as administrative 
obstacles to be overcome as quickly as possible. 

Although relatively few debtors appear to seek in-person services, some 
consumer advocates and others have said that debtors in all parts of 
the country should at least have the option of obtaining services in 
person. These parties have noted that while some debtors may find 
telephone counseling more convenient, others may find in-person 
services a more comfortable and effective option. The Trustee Program's 
Web site includes information about providers that offer in-person 
sessions and the locations for these sessions. 

Steps Under Way to Address Challenges of Certain Populations in 
Accessing Services: 

Some potential bankruptcy filers, such as those who do not speak 
English, have limited literacy skills, or are not represented by an 
attorney, may face certain challenges in accessing prefiling credit 
counseling and predischarge debtor education. The Trustee Program and 
the courts have certain actions planned or under way to help address 
these challenges. 

Non-English Speakers: 

As of October 2006, many credit counseling and debtor education 
providers offered their services in Spanish, and several offered 
services in other languages. For example, two large nationwide 
providers can conduct sessions in at least 15 languages and, using a 
translation services contractor, can provide sessions in about 150 
languages. Because these providers offer telephone counseling and have 
been approved to provide counseling and education in almost all 
judicial districts, their services are accessible to debtors 
nationwide. Some smaller local providers also offer in-person and 
telephone services in languages other than English--for example, a 
provider serving a region with large Chinese and Korean populations 
told us that it offered services in those languages. Providers that 
cannot offer services in a client's primary language may refer the 
client to a provider that can. In some cases, counseling or education 
sessions are translated for the debtor by a friend or family member, 
although representatives who advocate for language access issues told 
us that this method is not fully effective. In addition, some providers 
offer written materials in Spanish but not in other foreign languages. 
As a result, debtors whose primary language is other than English or 
Spanish will receive information orally, but may not benefit from 
supplementary written materials. 

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. One 
advocate noted that translation of these sessions may not always be 
effective given the technical nature of some of the financial terms 
used and the sensitive nature of the topics under discussion. These 
concerns were highlighted in a March 2006 decision in the Southern 
District of Florida, where a bankruptcy judge waived the prefiling 
credit counseling requirement for a man who said he was unable to find 
a provider that could offer him counseling in Creole.[Footnote 50] 
However, although comprehensive data do not exist, most providers told 
us that demand for sessions in languages other than English and Spanish 
has been low. For example, one large nationwide provider estimated that 
less than one-half of 1 percent of its clients require the use of its 
telephone-based translation services contractor. This provider also 
told us it had not had any requests for in-person counseling in 
languages other than English or Spanish. 

When the Bankruptcy Act went into effect in October 2005, the Trustee 
Program's Web site did not include any information on which foreign 
languages individual providers offered. In April 2006, the Trustee 
Program modified its Web site to include foreign languages offered by 
providers. The Trustee Program surveyed all providers in November 2006 
to gather additional information on their available languages and 
translation services. As of January 2007, the Web site allowed users to 
conduct a search to identify providers offering services in any one of 
29 languages.[Footnote 51] A program official told us that he expected 
that eventually the Web site will include a function that will allow 
consumers to search, by provider and location, for all languages and 
translation services offered. 

Individuals With Special Needs or Circumstances: 

Apart from non-English speakers, certain other populations may have 
experienced challenges in accessing counseling and education sessions. 
For example, it may be difficult for individuals with limited literacy 
skills to understand counseling and education sessions, which often 
rely heavily on written materials. In such cases, some providers told 
us that during the session they read aloud most of the written 
materials. Some consumer advocates and representatives of bankruptcy 
attorneys have also expressed concerns about the ability of disabled, 
elderly, or incarcerated debtors to easily access credit counseling and 
debtor education in an effective and timely manner. We could not find 
any data on the nature of and extent to which such difficulties exist. 
Most participants in the bankruptcy credit counseling process that we 
spoke with said that while there may be individual examples in which 
debtors with special needs faced challenges accessing needed services, 
it did not appear that this was an issue for a large number of debtors. 

Debtors Without Attorneys Also Can Face Challenges: 

Debtors filing for bankruptcy protection may use an attorney or may 
file without one (pro se). The proportion of debtors filing pro se 
varies across different judicial districts. For example, among seven 
bankruptcy courts that the Administrative Office of the U.S. Courts 
surveyed at our request, as few as 4.5 percent and as many as 24.9 
percent of debtors filed pro se.[Footnote 52] At the initial meeting 
with a client, a bankruptcy attorney will typically tell the client 
about the credit counseling requirement. The attorney will often give 
the client contact information for approved counseling agencies and may 
provide a room with a telephone so that clients can fulfill the 
counseling requirement on the spot. 

Debtors who file without the aid of an attorney can learn of the 
prefiling credit counseling requirement through other sources, such as 
instructional information located on the form of the voluntary petition 
that must be filed by the debtor, in other written materials provided 
by the bankruptcy court, or on the Web sites of the bankruptcy courts 
or the Trustee Program. Each of the 94 federal judicial districts has 
its own methods of disseminating explanatory information. When we 
telephoned bankruptcy courts in seven judicial districts to inquire 
about the process for filing for bankruptcy, staff typically directed 
us to the court's Web site. A review of nine courts' Web sites found 
that all but one highlighted the prefiling counseling requirement in a 
relatively prominent fashion, such as noting it on their home page. In 
one case, the requirement was not prominently noted, but instead was 
included among a long list of public notices. 

The bankruptcy courts in all districts use a uniform set of Official 
Bankruptcy Forms that individuals must complete to file and take action 
in bankruptcy cases. In June 2006, at the suggestion of the Trustee 
Program, the Advisory Committee on Bankruptcy Rules of the Judicial 
Conference of the United States modified the main form for filing a 
bankruptcy petition to make the prefiling counseling requirement more 
clear and conspicuous. The form now requires that petitioners attach an 
additional exhibit--Individual Debtor's Statement of Compliance With 
Credit Counseling Requirement--to attest to compliance with the 
requirement or claim an exigent circumstance. 

Debtors who file for bankruptcy without fulfilling the credit 
counseling requirement can face a variety of consequences. A survey 
conducted by the Federal Judicial Center asked U.S. bankruptcy judges 
what procedures they follow when a debtor has not produced a prefiling 
credit counseling certificate.[Footnote 53] When asked in the survey to 
select one or more, 44 percent of judges said they had given such 
filers a specified period to produce the certificate, 34 percent had 
issued an Order to Show Cause or otherwise set a hearing on the 
deficiency, 20 percent had taken no action, and 13 percent had 
dismissed the case. The survey also showed that 35 percent of the 
judges said they treated imminent foreclosure or eviction, by itself, 
as an exigent circumstance, while about 55 percent treated this as an 
exigent circumstance only if the debtors could satisfactorily explain 
why they had not yet received credit counseling. Another 10 percent 
said that imminent foreclosure or eviction was never an exigent 
circumstance. 

Before the Bankruptcy Act went into effect, some policymakers, consumer 
advocates, and others expressed concern that the credit counseling 
requirement could 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. However, we did not identify data on the 
extent to which failure to receive credit counseling has created such 
hardships. 

Conclusions: 

Within a limited time frame, the Trustee Program established policies 
and procedures for selecting credit counseling and debtor education 
providers, and thus far relatively few concerns have been raised about 
the competence of approved providers. We found that the program's 
process for reviewing credit counseling applicants was generally 
comprehensive and included numerous steps designed to assess 
applicants' proficiency and reputability. The Trustee Program said it 
is carefully monitoring the circumstances of the IRS examinations of 
four approved providers and will take appropriate actions based on the 
outcomes of these examinations--which we agree is essential given that 
IRS's past examinations have often revealed abusive practices. 

We also found that the value of the prefiling credit counseling 
requirement is not clear. The requirement was intended to provide 
consumers with information about bankruptcy and its alternatives so 
they can make informed decisions about their options. In practice, 
however, anecdotal evidence strongly suggests that most consumers have 
no realistic alternative to bankruptcy by the time they receive the 
counseling. As such, a wide range of stakeholders view the prefiling 
counseling requirement as an administrative obstacle rather than a 
useful exercise. It is therefore uncertain whether the requirement is 
achieving its key goal of helping consumers determine whether or not to 
file for bankruptcy. Better data on the outcomes of prefiling credit 
counseling would help program managers and policymakers determine its 
value. In particular, it would be useful to confirm whether, as many 
believe, nearly all consumers who receive prefiling counseling 
subsequently file for bankruptcy. The Trustee Program does not 
currently collect this information because doing so is not part of its 
explicit statutory responsibilities. In addition, there is currently no 
mechanism in place to match individual counseling certificates with 
bankruptcy filings. However, appropriate data on outcomes are essential 
to understanding program benefits and costs and to effective oversight 
and decision making. Data on how often counseling sessions result in 
bankruptcy filings or other outcomes would help determine how well the 
prefiling credit counseling requirement is serving its intended 
purpose. 

There is less debate about the predischarge debtor education 
requirement, which provides broad-based financial education to debtors 
near the end of the bankruptcy process. This requirement is consistent 
with the increased attention being paid by Congress and executive 
branch agencies in recent years to improving Americans' 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 
in current and future generations.[Footnote 54] 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. 

The fees charged for credit counseling and debtor education services 
generally appear to be reasonable. However, the extent to which fees 
are waived varies considerably among providers. The Trustee Program has 
not issued rules or formal guidance for what constitutes a debtor's 
"ability to pay" because it wants to give providers flexibility to 
respond to market conditions. While we understand the program's 
reluctance to be too prescriptive, we also believe that clearer 
guidance on criteria for reducing or waiving fees would have several 
benefits, including reducing uncertainty among providers about 
appropriate criteria, providing greater transparency on waiver 
policies, and ensuring compliance with minimum standards for waiving 
fees among all providers. At the same time, this guidance should give 
providers some flexibility, so as not to discourage those who may wish 
to waive fees more liberally than required. 

The supply of credit counseling and debtor education providers appears 
to be sufficient to allow consumers to access these services in a 
timely manner. While in-person services are not always available in 
some locations, this concern is somewhat mitigated by the fact that the 
great majority of clients appear to prefer telephone or Internet 
counseling. Accessing services in languages other than English or 
Spanish has been a challenge for some consumers, however. The Trustee 
Program's recent efforts to better communicate providers' language and 
translation services represent positive actions in facilitating access 
by speakers of foreign languages. 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. 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. 

* To clarify the Bankruptcy Act's requirement that prefiling credit 
counseling and predischarge debtor education be provided regardless of 
a client's ability to pay, the Trustee Program should issue formal 
guidance on what constitutes "ability to pay." In developing this 
guidance, the program should examine the reasons behind the significant 
variation among providers in waiving fees. In addition, while this 
guidance should set a minimum benchmark for when fees should be reduced 
or waived, it should be designed so as not to limit or discourage 
providers who may wish to waive fees for more clients than qualify 
under the minimum benchmark. 

Agency Comments: 

We provided a draft of this report to the Administrative Office of the 
U.S. Courts, Department of Justice, and IRS for comment. These agencies 
provided technical comments that we incorporated as appropriate. In 
addition, on behalf of the Department of Justice, the Executive Office 
for United States Trustees provided a written response, which is 
reprinted in appendix III. 

In its comment letter, the Trustee Program said that it concurred with 
our recommendation to develop a mechanism that would allow the program 
or other parties to track the outcomes of prefiling credit counseling. 
The program noted that it already collects certain outcome data from 
providers through mechanisms such as its reapplication process and 
quality service reviews. It said it plans to refine and expand its 
current tracking and data collection methods and explore the 
feasibility of developing more comprehensive outcome measures. The 
Trustee Program also concurred with our recommendation related to 
issuing formal guidance on what constitutes ability to pay. The program 
said that it will promulgate formal fee waiver guidance in a rulemaking 
later this year and will study the fee waiver variations among approved 
providers. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of it until 30 
days from the date of this letter. We will then send copies of this 
report to the Director of the Administrative Office of the U.S. Courts, 
the Attorney General, the Commissioner of Internal Revenue, and 
interested congressional committees. We will also make copies available 
to others upon request. In addition, the report will be available at no 
charge on the GAO Web site at http://www.gao.gov. 

If you or your staffs have any questions concerning this report, please 
contact me at (202) 512-8678 or jonesy@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions to 
this report are listed in appendix IV. 

Signed by: 

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

List of Requesters: 

The Honorable Patrick Leahy: 
Chairman: 
Committee on the Judiciary: 
United States Senate: 

The Honorable John Conyers, Jr. 
Chairman: 
Committee on the Judiciary: 
House of Representatives: 

The Honorable Richard J. Durbin: 
The Honorable Russell D. Feingold: 
The Honorable Edward M. Kennedy: 
United States Senate: 

The Honorable Howard L. Berman: 
The Honorable William D. Delahunt: 
The Honorable Chris Van Hollen: 
The Honorable Sheila Jackson Lee: 
The Honorable Zoe Lofgren: 
The Honorable Jerrold Nadler: 
The Honorable Robert C. Scott: 
The Honorable Debbie Wasserman Schultz: 
The Honorable Melvin L. Watt: 
House of Representatives: 

[End of section] 

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. 

To address all of the objectives, we reviewed the provisions of the 
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
(Bankruptcy Act) related to credit counseling and debtor education and 
examined its legislative history. We also reviewed the July 2006 
interim final rule on application procedures and criteria for approval 
of credit counseling and debtor education agencies, and we obtained and 
reviewed the public comments on this rule received by the Department of 
Justice's Trustee Program. We also interviewed representatives of, and 
obtained relevant documentation from, the Trustee Program's Credit 
Counseling and Debtor Education Unit, as well as the Federal Trade 
Commission, Internal Revenue Service (IRS), Administrative Office of 
the United States Courts, and the National Association of Attorneys 
General, including representatives from four states. In addition, we 
interviewed and collected documents from the American Bankruptcy 
Institute; National Association of Consumer Bankruptcy Attorneys; 
National Association of Bankruptcy Trustees; National Association of 
Chapter 13 Trustees; creditor organizations, such as the American 
Bankers Association and the Financial Services Roundtable; academic 
researchers; and consumer organizations, such as the Consumer 
Federation of America and the National Consumer Law Center. We also 
reviewed and analyzed data from the Trustee Program on complaints 
received related to credit counseling and debtor education providers, 
and the resolution of these complaints. 

Further, we conducted comprehensive interviews with representatives of 
10 providers of credit counseling or debtor education that had been 
approved by the Trustee Program. Seven of these providers had been 
approved to offer both of these services, while one offered only credit 
counseling and two offered only debtor education. These providers were 
selected because they included the three largest providers of each 
service and represented a range of different sizes, modes of delivery 
(in-person, telephone, and Internet), geographic locations, trade 
association affiliations, types of organizations, and years of 
experience. These 10 providers represented 62 percent and 53 percent of 
all prefiling credit counseling and predischarge debtor education 
certificates, respectively, that were issued from January 9, 2006, 
through October 17, 2006. We obtained from nearly all of them materials 
used to facilitate sessions, such as counselor training manuals, 
curricula, disclosures, workbooks, and handouts. In addition, we 
interviewed representatives of two trade organizations representing 
credit counseling agencies, the National Foundation for Credit 
Counseling, and the Association of Independent Consumer Credit 
Counseling Agencies. 

To address all of the objectives, we also reviewed a nonprobability 
sample of the Trustee Program's case files for 32 provider applications 
that were approved and 11 applications that were rejected. Among the 
approved applications we reviewed, 15 were for credit counseling and 17 
were for debtor education; as of October 2006, the Trustee Program had 
approved 153 credit counseling providers and 268 debtor education 
providers. Among the rejected applications we reviewed, 6 were for 
credit counseling and 5 were for debtor education; as of October 2006, 
the Trustee Program had rejected 96 applications. We did not do a 
probability sample because of the limited size of the sample we could 
review and because we wanted to ensure that the small sample included 
all of the largest providers and specific numbers of other types of 
providers. The criteria we used to select the provider application 
files included (1) size of the provider, as measured by number of 
clients served 12 months prior to applying for Trustee Program 
approval, (2) delivery mode (in-person, telephone, and Internet), (3) 
type of organization (such as nonprofit agency, educational 
institution, or Chapter 13 panel trustee), (4) length of time in 
business, (5) trade association affiliation, and (6) geographic 
location. The providers represented in our file review had issued 77 
and 67 percent, respectively, of all credit counseling and debtor 
education certificates issued from January 9 through October 17, 2006. 

The case files we reviewed included, among other things, agencies' 
initial applications, protocols, curricula and other guidance used by 
counselors and instructors, written materials and disclosures provided 
to consumers, fee schedules, and correspondence between the provider 
and the Trustee Program. To facilitate the case file review, we 
developed a data collection instrument to record specific information 
for each case file reviewed. To protect the confidentiality of agencies 
whose applications were approved or rejected, we did not record in our 
notes or include in our workpapers any identifying information from 
these file reviews (such as agencies' and individuals' names). Instead, 
we used unique numeric codes to track, for the purposes of our 
analysis, the information associated with individual applicants. We 
conducted our review on site at the offices of the Executive Office for 
U.S. Trustees. 

To address the first objective, in addition to the steps described 
above, we reviewed and analyzed the Trustee Program's written policies, 
rules, guidance, and procedures for approving credit counseling and 
debtor education providers, including the initial and revised 
applications and instructions. To determine whether IRS had revoked the 
section 501(c)(3) tax-exempt status under the Internal Revenue Code, or 
taken other enforcement actions against providers, we met with IRS 
officials and reviewed their publicly available information. To 
determine if providers had been subject to other enforcement actions, 
we met with representatives of the Federal Trade Commission and 
selected state investigative agencies. We also met with the Council of 
Better Business Bureaus and obtained Better Business Bureau reports for 
a selection of offices of the three largest providers. 

To address the second objective, we reviewed and analyzed the materials 
used by our sample of providers to facilitate in-person, telephone, and 
Internet counseling and debtor education. For context, we observed a 
credit counseling session conducted in person (for which the provider 
obtained the client's consent) and listened to a recording of a 
counseling session conducted by telephone (which did not allow 
identification of the client). We also observed two debtor education 
sessions conducted by telephone--one live and one recorded--which did 
not include the clients' identities. We also participated, with the 
provider's consent, in three mock credit counseling sessions conducted 
via the Internet. 

To address the third objective, we reviewed guidance provided by the 
Trustee Program on its Web site related to fees and fee waivers. We 
reviewed and analyzed data maintained by the Trustee Program related to 
providers' fees, but we determined that these data were not reliable. 
As a result, to learn providers' fees and waiver policies, we relied 
largely on testimonial evidence from 10 providers we interviewed. In 
some cases, we also reviewed fee information supplied by providers on 
their Web sites. We also reviewed a study by the National Foundation 
for Credit Counseling that included information on its members' fees 
for prefiling counseling and debtor education sessions. 

To address the fourth objective, we reviewed available data from the 
Trustee Program on the number and characteristics of providers and 
analyzed the number and geographic distribution of providers. We also 
reviewed the Trustee Program's Web site, which serves as its primary 
mechanism for supplying information on which providers have been 
approved by the program. We also reviewed a survey of bankruptcy judges 
that was conducted by the Federal Judicial Center in March 2006. 
Further, at our request, the Administrative Office of the U.S. Courts 
gathered information from the bankruptcy courts in seven judicial 
districts related to how the court handles debtors who fail to submit 
prefiling credit counseling certificates with their bankruptcy 
petitions. To better understand the experience of pro se debtors, we 
also telephoned bankruptcy courts in seven judicial districts to 
inquire about the steps needed for a bankruptcy filing and reviewed the 
information and instructions on Web sites of nine bankruptcy courts. We 
also reviewed relevant portions of the Federal Rules of Bankruptcy 
Procedure, including the standardized forms, attachments, and 
supporting instructions required by the courts to file a bankruptcy 
petition. In addition, we reviewed certain decisions issued by 
bankruptcy court judges regarding the failures of bankruptcy filers to 
fulfill the credit counseling requirement. To gather additional 
information on issues related to language, we met with a representative 
of an organization that advocates for improved language access and 
analyzed the Trustee Program Web site for the ease with which consumers 
can identify providers offering services in foreign languages. 

To understand the implementation of the credit counseling and debtor 
education provisions in the six judicial districts in Alabama and North 
Carolina, we interviewed staff at the Administrative Office of the U.S. 
Courts and two bankruptcy administrators, one in Alabama and one in 
North Carolina. We also reviewed provider applications promulgated by 
the judicial districts in these two states, as well as the lists 
maintained by the six judicial districts of providers that have been 
approved. As part of our case file review, we also reviewed materials 
from some credit counseling and debtor education providers that had 
been approved in one or more of these six districts. 

We conducted our review from February 2006 through March 2007 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: Implementation of Counseling and Education Provisions in 
Alabama and North Carolina: 

As a result of legislation passed by Congress in 1986, the 
administration of bankruptcy cases in Alabama and North Carolina is 
overseen by bankruptcy administrators rather than the Trustee Program. 
In the six judicial districts in these states, a bankruptcy 
administrator, under the Administrative Office of the U.S. Courts, is 
responsible for supervising the administration of bankruptcy cases, 
including maintaining panels of private bankruptcy trustees who 
liquidate debtors' assets and monitor repayment plans. These 
administrators are also responsible for implementing the Bankruptcy 
Act's credit counseling and debtor education provisions. To gather 
information on this implementation in these two states, we spoke with 
two bankruptcy administrators, one in Alabama and one in North 
Carolina, and an official of the Administrative Office of the U.S. 
Courts. 

Bankruptcy administrators in Alabama and North Carolina told us they 
have largely mirrored the requirements, guidance, and practices 
established by the Trustee Program for approving credit counseling and 
debtor education providers. They use a slightly modified version of the 
Trustee Program's instructions and application forms, and follow a 
similar process for reviewing applications. Unlike the Trustee Program, 
the bankruptcy administrators do not require applicants and providers 
to submit a written waiver authorizing access to confidential 
information about the agency from IRS, although the administrators are 
currently considering such a measure. 

The six judicial districts in Alabama and North Carolina had approved 
between 9 and 14 credit counseling providers and between 10 and 14 
debtor education providers, according to information given on these 
districts' Web sites as of January 2007.[Footnote 55] Many of these 
providers had also been approved by the Trustee Program to offer 
services in other judicial districts, but a few were small, local 
organizations that were approved only in one district. None of the 
providers approved in these two states had had its tax-exempt status 
revoked by IRS. However, an IRS official confirmed that IRS is 
examining the tax-exempt status of two credit counseling agencies 
approved by bankruptcy administrators in Alabama and North Carolina. 
The Administrative Office of the U.S. Courts told us if a provider's 
tax-exempt status were to be revoked, that provider's approval to 
provide prefiling credit counseling could be reexamined. In addition, a 
Trustee Program official told us that one provider approved in Alabama 
or North Carolina had applied but been denied approval by the Trustee 
Program because, among other things, its counseling was not found to be 
adequate and its board of directors was not found to be sufficiently 
independent. 

In general, the course content and mode of delivery for credit 
counseling and debtor education providers in Alabama and North Carolina 
were similar to those in other judicial districts. We found only two 
notable differences. First, the Trustee Program requires that approved 
Internet-based credit counseling sessions include a separate component 
in which the client has individual communication with a counselor, such 
as a telephone conversation or Web-based chat. However, administrators 
in Alabama and North Carolina told us their approved credit counseling 
sessions may be conducted entirely via the Internet without any direct 
interaction between the debtor and a counselor. Second, the fees 
charged by providers for credit counseling and debtor education 
sessions were typically $25 to $40, according to the administrators, as 
compared with an average of roughly $50 in the rest of the nation. 

[End of section] 

Appendix III: Comments from the Department of Justice: 

U.S. Department of Justice: 
Executive Office for United States Trustees: 
Office of the Director: 
Washington, D.C. 20530: 

March 8, 2007: 

Ms. Yvonne Jones: 
Director, Financial Markets and Community Investment: 
Government Accountability Office: 
Washington, DC 20510-1501: 

RE: GAO-07-203 Report: 

Dear Director Jones: 

Thank you for the opportunity to review the Government Accountability 
Office's draft report on implementation of the credit counseling and 
debtor education provisions of the Bankruptcy Abuse Prevention and 
Consumer Protection Act of 2005 (BAPCPA). The draft report provides a 
comprehensive review of the major aspects of implementation of these 
provisions by the United States Trustee Program (USTP or Program), and 
concludes that we have successfully fulfilled our statutory mandates. 
GAO makes two recommendations for future action which we endorse. We 
would also like to take this opportunity to provide comments on several 
key findings and conclusions made in the draft report, as well as our 
initial plans to implement the GAO's recommendations. 

Key Findings and Conclusions: 

1 . The GAO concluded that the USTP developed and implemented a 
comprehensive, effective, and timely process for the approval of 
eligible credit counselors and debtor educators. GAO gives credit to 
the Program for establishing the approval process under the demanding 
deadlines set forth in the statute, and further notes that we have 
established an effective process to investigate complaints and obtain 
corrective actions where appropriate. GAO also points out that the 
Program is providing for the enhanced oversight of agencies through the 
on-site, post-approval review of provider operations. Importantly, GAO 
found few issues relating to the competence, integrity, or performance 
of providers approved by the Program. This is particularly noteworthy 
since the credit counseling industry had been the subject of both 
enforcement actions by Federal agencies and criticism by the Congress. 

We suggest that two issues covered in the draft report merit further 
explanation. First, on page 10 of the report, GAO provides data 
relating to the number of approved and rejected applications. So that 
the numbers have some context, it may be useful to note that the 96 
applications rejected and the 123 applications withdrawn after USTP 
review were out of 680 original applications. This translates to 64 
percent approved and 32 percent either rejected or withdrawn (with 4 
percent still in process). 

Second, on page 15, GAO notes that the interim final rule allows the 
Program to immediately remove a credit counseling agency if that 
agency's tax-exempt status is revoked by the IRS. It is important to 
clarify that decisions to remove agencies are first made based upon the 
BAPCPA eligibility criteria, and agencies determined to no longer meet 
eligibility standards normally are entitled to exhaust a 45-day 
administrative review process before removal. The interim rule provides 
that agencies whose tax-exempt status is revoked by the IRS may be 
removed immediately. The immediate removal is a consumer protection 
provision which permits the Program to address cases where the IRS' 
revocation is based on conduct that may compromise the integrity of the 
credit counseling services. 

2. The GAO found that credit counseling and debtor education services 
are available to debtors in a reasonable time frame. Although the 
capacity of providers is a matter requiring continual USTP monitoring, 
providers maintain they will be able to expand their capacity if 
necessary to meet an increase in demand. The GAO also found that 
services are generally available to debtors with limited English 
proficiency, and that the USTP has taken appropriate steps to 
facilitate a debtor's search for an agency which can provide the 
services in the debtor's native language. Moreover, GAO confirmed that 
most debtors prefer telephone counseling and that there is limited 
reliable research on the effectiveness of the various modes of delivery 
of counseling and education. 

It is important to note that the Program contracted with the Rand 
Corporation to review the comparative effectiveness of telephonic, 
Internet, and in person modes of delivery. The Rand report is expected 
to be issued in the first half of calendar year 2007. 

3. The GAO found that fees charged by providers are reasonable and that 
fees are waived for debtors with an inability to pay. The draft report 
further documents efforts by the Program to require disclosure by 
providers of their fee waiver policies and corrective actions required 
of providers who do not have adequate fee schedules or waiver policies. 
The GAO suggests that the Program formalize its guidance on fee waivers 
in its next rule-making procedure and further suggests that such 
guidance provide flexibility so that providers may adopt more generous 
criteria. 

As discussed below, the Program endorses this recommendation. With more 
than one year of experience implementing the credit counseling and 
debtor education provisions of the law, we are now in a much better 
position to promulgate a standard with regard to credit counseling and 
debtor education fee waivers. The task of devising a sufficiently 
flexible standard that ensures debtors who are unable to pay are not 
required to pay is quite difficult, but important to accomplish. The 
courts have faced a similar challenge with regard to filing fee waiver 
determinations under 28 U.S.C. § 1930(f), and anecdotal evidence 
suggests that judicial determinations vary widely by district. 

4. The GAO notes that there is limited reliable data on the outcomes of 
credit counseling sessions. It also notes that the BAPCPA does not 
mandate the collection or evaluation of such data. While we agree with 
the GAO recommendation that the USTP develop a mechanism so that we and 
others can track outcomes, we believe the report does not provide a 
complete explanation of efforts made to date to accomplish this goal. 

The Program developed a certificate issuance system to provide greater 
security and assurance that filed certificates are genuine. This also 
allowed us to determine that from May 31, 2006, to October 27, 2006, 
373,615 credit counseling certificates were issued. During this same 
time period, factoring out cases filed by non-individuals (e.g., 
corporations) and joint filings (i.e., one case filed, but a separate 
certificate filed by each spouse), we determined that at least 10 
percent of those who were issued certificates decided not to file 
bankruptcy after receiving credit counseling. The primary limitation to 
this estimate is that individuals may file bankruptcy after a 
substantial gap in time. 

Tracking the outcome of credit counseling has been a focus of many of 
the activities of the Program (e.g., data collection as part of the re- 
application process and analysis conducted as part of the Program's 
quality service reviews of providers) during the first year of the 
BAPCPA. Going forward, this information, combined with enhanced 
automation and time series data that will be available with the passage 
of time, will provide the Program with more reliable information on the 
outcome of credit counseling. 

Recommendations: 

GAO makes two recommendations for further action by the USTP. The 
Program concurs in the recommendations and responds as follows. 

1. The GAO recommends that the Program "develop a mechanism that would 
allow the Program or other parties to track outcomes of prefiling 
credit counseling, including the number of individuals issued 
counseling certificates who then file for bankruptcy." The USTP will 
develop such a mechanism by refining and expanding our current methods. 
In addition, we will explore the feasibility of developing more 
comprehensive outcome measures. 

2. The GAO recommends that the Program "issue formal guidance on what 
constitutes `ability to pay' . . . [and] examine the reasons behind the 
significant variation among providers in waiving fees." The USTP will 
promulgate formal fee waiver guidance in a rule making later this year 
and will study the fee waiver variations among approved providers. 

We greatly appreciate the GAO's constructive review of the Program's 
implementation of the new legal requirements for credit counseling and 
debtor education. The close interaction of the GAO and UST? staff was 
entirely professional, GAO was sensitive to resource demands, and the 
final report will be of enormous utility to us as we seek to enhance 
our capability to fulfill our statutory mission in this important new 
area of responsibility. 

Sincerely yours, 

Signed by: 

Clifford J. White III: 
Director: 

cc: Honorable William W. Mercer: 
Acting Associate Attorney General: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Yvonne D. Jones, (202) 512-8678 or jonesy@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Jason Bromberg, Assistant 
Director; Gwenetta Blackwell-Greer; Anne A. Cangi; Emily R. Chalmers; 
Alexandra K. Dew; Melissa J. Jaynes; Carl M. Ramirez; and Omyra 
Ramsingh made key contributions to this report. 

FOOTNOTES 

[1] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 
106, Pub. L. No. 109-8, 119 Stat. 23, 37-42 (2005) (amending various 
sections of Title 11). For the purposes of this report, 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. 

[2] In this report 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 report refer collectively to the United States Trustees and the 
Executive Office for United States Trustees. 

[3] Because businesses are not subject to the credit counseling or 
debtor education provisions of the Bankruptcy Act, the scope of this 
report is limited to personal bankruptcies. 

[4] There are 90 bankruptcy courts among the 94 judicial districts. The 
Eastern and Western Arkansas judicial districts are served by a single 
bankruptcy court and bankruptcy cases in the Guam, Virgin Islands, and 
Northern Marianas judicial districts are filed in district court. 

[5] Neither the prefiling counseling requirement nor the predischarge 
debtor education course requirement are applicable with respect to a 
debtor who (i) resides in a district that a U.S. Trustee has determined 
does not have adequate capacity to service individuals requesting 
counseling or (ii) is incapacitated, disabled, or on active military 
duty in a military combat zone. 11 U.S.C. §§ 109(h)(2), 109(h)(4), 
727(a)(11) and 1328(g)(2). 

[6] A debtor may be granted a temporary waiver to complete the 
counseling requirement after the filing of the petition if the debtor 
satisfies the court that (1) an exigent circumstance merits it, and (2) 
the debtor requested services from an approved provider but was unable 
to obtain them within 5 days. If the exemption is granted, the debtor 
has up to 30 days after filing the petition to complete the counseling 
requirement. However the court may, for cause, extend the 30-day grace 
period by up to an additional 15 days. 11 U.S.C. § 109(h)(3). 

[7] See, for example, U.S. Senate Committee on Homeland Security and 
Governmental Affairs, Permanent Subcommittee on Investigations. 
Profiteering in a Non-profit Industry: Abusive Practices in Credit 
Counseling (Washington, D.C.: Mar. 24, 2004). 

[8] FTC v. AmeriDebt, Inc. et al., Civil Action No.: PJM 03-3317 (D. 
Md. 2006) available at Hyperlink, 
http://www.ftc.gov/os/caselist0223171/0223171ameridebt.htm; FTC v. 
Better Budget Financial Services, Inc. et al., Civ. No. 04-12326 (WGY) 
(D. Mass 2005) available at Hyperlink, 
http://www.ftc.gov/os/caselist/0412326/0412326.htm); FTC v. Debt 
Management Foundation Services, Inc., et al., Case No.: 8:04-CIV-1674-T-
17-MSS (M.D. FL. 2005) available at Hyperlink, 
http://www.ftc.gov/os/caselist/0423029/0423029.htm); FTC v. National 
Consumer Council, Inc et al., Civ. No. SACV04-0474CJC (JWJX) (C.D. Ca. 
2005) available at Hyperlink,  
http://www.ftc.gov/os/caselist/0323185/0323185.htm. 

[9] Treasury Inspector General for Tax Administration, Abuses in the 
Tax-Exempt Credit Counseling Industry Are Being Addressed, but Further 
Actions Are Needed to Ensure Overall Industry Compliance, Reference 
Number: 2006-10-081 (Washington, D.C.: May 2006). 

[10] The Pension Protection Act of 2006 amended section 501 of the 
Internal Revenue Code to establish additional requirements that credit 
counseling organizations must satisfy in order to qualify for tax- 
exempt status under either section 501(c)(3) or section 501(c)(4). See 
Pub. L. No. 109-280, § 1220, 120 Stat. 780, 1086-89 (2006) (to be 
codified at 26 U.S.C. § 501(q)). For example, an organization is 
prohibited from making loans (other than interest-free loans) to 
debtors. The additional requirements will not apply to 501(c)(3) and 
501(c)(4) organizations existing before the enactment of the Pension 
Protection Act until after August 17, 2007. An IRS official noted that 
the revocations of credit counseling agencies' tax-exempt status were 
not related to changes made by the Pension Protection Act. 

[11] When IRS issues a determination letter proposing revocation or 
modification of an organization's tax-exempt status, the organization 
may, within 30 days of the date of the letter, appeal to the Office of 
the Regional Director of Appeals. If no appeal is filed, the taxpayer 
is sent a letter giving the taxpayer 90 days to file a petition in U.S. 
Tax Court, U.S. Claims Court, or the U.S. District Court for the 
District of Columbia. 

[12] 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, 
because most federal tax-exempt organizations are nonprofit 
organizations, 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. 

[13] 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. 38076 (2006) (interim final rule). 

[14] Section 106(e) of the Bankruptcy Act amended the bankruptcy code 
to require that prefiling credit counseling agencies must provide 
counselors with adequate training and experience in providing credit 
counseling. 11 U.S.C. §111(c)(2)(F). The interim final rule specifies 
that a counselor will be deemed to have "adequate training and 
experience" if the counselor is accredited or certified by a recognized 
independent organization, or has successfully completed a course of 
study acceptable to the Trustee Program and has worked a minimum of 6 
months in a related area. 71 Fed. Reg. at 38078-79 (to be codified at 
28 C.F.R. § 58.15(f)(2)). 

[15] 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. § 58.17). 

[16] 71 Fed. Reg. at 38082 - 84 (to be codified at 28 C.F.R. § 58.25). 

[17] 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. 

[18] Of the 32 approved applications we reviewed, 15 were for credit 
counseling and 17 were for debtor education, and they represented 
approximately 77 percent and 67 percent, respectively, of the 
certificates issued between January 9, 2006, and October 17, 2006. Of 
the 11 denied applications we reviewed, 6 were for credit counseling 
and 5 were for debtor education. 

[19] The data related to providers' experience and accreditation were 
provided by the Trustee Program and are as of March 2006, when there 
were 142 providers. The National Foundation for Credit Counseling 
includes more than 100 nonprofit member agencies, many of which use the 
name "Consumer Credit Counseling Service®." Its member agency 
counselors must complete training in its Counselor Certification 
Program. The Council on Accreditation is an independent, third-party, 
not-for-profit accrediting organization that has reviewed more than 
1,500 social service programs to ensure compliance with best-practices 
standards. 

[20] Organizations that qualify for tax-exempt status under Internal 
Revenue Code section 501(c)(3) are exempt from certain federal and 
state consumer protection laws. For example, 501(c)(3) corporations are 
not subject to the Credit Repair Organizations Act, which imposes 
restrictions on credit repair organizations aimed at protecting the 
public from unfair or deceptive advertising and business practices. See 
15 U.S.C. §§ 1679 et seq. Generally, a credit repair organization is 
defined as any person who provides, for a fee, services for the express 
or implied purpose of improving a consumer's credit record, credit 
history, or credit rating. 15 U.S.C. § 1679a(3). 

[21] According to Trustee Program data, 939,193 credit counseling and 
debtor education certificates were issued between January 9, 2006, and 
October 17, 2006. The program does not have data on the number of 
certificates issued between October 17, 2005, when the counseling and 
education requirements went into effect, and January 9, 2006. 

[22] 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. 
On May 9, 2006, IRS issued a Chief Counsel Advice Memorandum (CCA 
200620001) that provided a legal framework to determine whether a 
credit counseling organization that offers counseling and debt 
management plans to the general public operates in furtherance of 
educational purposes consistent with section 501(c)(3). 

[23] 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. 

[24] 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. § 58.16(i)(1)). 

[25] 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. § 
58.16(i)(4)(i)). 

[26] 71 Fed. Reg. at 38080 (to be codified at 28 C.F.R. § 58.15(h)(3)). 

[27] As noted earlier, roughly 6 percent of the credit counseling 
agencies approved by the Trustee Program are not tax exempt under 
section 501(c)(3) of the Internal Revenue Code, although they are 
nonprofit organizations under other applicable state laws. 

[28] 71 Fed. Reg. at 38081 (to be codified at 28 C.F.R. § 58.17(f)(8)). 

[29] According to a Trustee Program official, the statutory language 
requiring a "briefing. . . that outline[s] opportunities for available 
credit counseling" has been interpreted by the Trustee Program and 
providers involved to mean a credit counseling session. 11 U.S.C. § 
109(h)(1). 

[30] See 71 Fed. Reg. at 38079 (2006) (to be codified at 28 C.F.R. § 
58.15 (f)). 

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

[32] M. Staten and J. Barron, Evaluating the Effectiveness of Credit 
Counseling. Phase One: The Impact of Delivery Channels for Credit 
Counseling Services (May 31, 2006). The study reviewed traditional 
credit counseling rather than counseling provided to satisfy the 
requirements of the Bankruptcy Act. 

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

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

[35] 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. 

[36] 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. 

[37] As of January 2007, providers must submit data semiannually to the 
Trustee Program on the number of their prefiling credit counseling 
clients who enter into debt management plans. In addition, the Trustee 
Program's Quality Service Reviews will examine information on the 
outcomes of counseling sessions at selected providers. However, the 
information these sources will provide is limited, in large part 
because providers do not track whether their clients subsequently filed 
for bankruptcy. 

[38] Data on the number of certificates issued were provided by the 
Trustee Program and cover January 9 through July 3, 2006. Data on the 
number of bankruptcy petitions filed were provided by the 
Administrative Office of the U.S. Courts and cover January 1 through 
June 30, 2006. 

[39] Section 105 of the Bankruptcy Act requires the Trustee Program to 
develop a debtor education course that can be used to satisfy the 
debtor education requirement. The act required the program to pilot the 
curriculum and materials in six judicial districts for 18 months. The 
Trustee Program is required to test the effectiveness of the course 
along with a sample of existing consumer education programs and report 
its findings to Congress. Bankruptcy Abuse Prevention and Consumer 
Protection Act of 2005, §105, 119 Stat. 23, 36-37.

[40] 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). 

[41] See 11 U.S.C. § 111(d)(1)(C). 

[42] 71 Fed. Reg. at 38082 (to be codified at 28 C.F.R. § 58.25(f)). 

[43] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 
105, 119 Stat. 23, 36-37. 

[44] Executive Office for U.S. Trustees, U.S. Department of Justice, 
Financial Education: Principles and Practices (Washington, D.C.: March 
2006). The judicial districts in which the curriculum was tested were 
the Northern District of Illinois, District of New Jersey, Northern 
District of Texas, Eastern District of Virginia, Western District of 
Virginia, and Eastern District of Washington. 

[45] Chapter 13 trustees administer cases filed under Chapter 13 of the 
Bankruptcy Code. The National Association of Chapter 13 Trustees is a 
nonprofit membership organization that includes Chapter 13 Trustees and 
staff, attorneys, judges, and other related professionals. 

[46] 11 U.S.C. §§ 111(c)(2)(B) and 111(d)(1)(E). See also Pension 
Protection Act of 2006 §1220 (to be codified at 26 U.S.C. § 501(q)) 
(imposing requirements regarding fees charged by credit counseling 
organizations that are tax exempt under Internal Revenue Code § 
501(c)(3)). 

[47] 71 Fed. Reg. at 38078-79 and 38082-83 (to be codified at 28 C.F.R. 
§§ 58.15(e) and 58.25(j)). 

[48] 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. 

[49] See 28 U.S.C. § 1930(f). 

[50] In re Petit-Louis, 338 B.R. 132 (Bankr.S.D.Fla. 2006) (finding 
that a petitioner who was fluent in Creole was entitled to a waiver of 
the prefiling counseling requirement where no approved provider in the 
judicial district in which the petitioner resided offered counseling 
services in the Creole language). 

[51] If a provider offers sessions in Spanish, this information is 
included in the main listing for the provider; for 29 other languages, 
consumers can conduct a search via a drop-down menu. 

[52] The seven bankruptcy courts surveyed by the Administrative Office 
of the U.S. Courts at our request were the Central District of 
California, the Northern District of California, the District of 
Colorado, the District for the District of Columbia, the Northern 
District of Illinois, the Northern District of Texas, and the Western 
District of Washington. These seven courts were chosen to represent 
different regions of the country. Because of the small sample size, 
information from these courts provides anecdotal information but cannot 
be projected to represent all bankruptcy courts. 

[53] Federal Judicial Center, "Implementing the Bankruptcy Abuse 
Prevention and Consumer Protection Act of 2005: Early Experience" (May 
17, 2006). The survey was conducted by the Federal Judicial Center--the 
education and research agency for the U.S. Courts--in March 2006 to 
collect information about judges' early experiences with the credit 
counseling requirement. The survey was sent to 312 active and 29 former 
bankruptcy judges; 157 of these responded to the survey. 

[54] 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). 

[55] The districts' Web sites varied with respect to how often they 
updated their lists of approved providers. Therefore, the specific date 
for which these numbers apply ranges, depending on the district, from 
October 26, 2006 to January 24, 2007. 

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