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A New Role for United States Trustees:
Approval of Credit Counseling Services
by Sue Ann Slates
Executive Office for United States Trustees
Last year, the House of Representatives and the Senate each passed a
different bankruptcy reform bill containing wide-ranging changes in the
bankruptcy laws applicable to individuals. Although the House and Senate
conferees offered compromise legislation in the Conference Report on H.R. 3150,
that bill was not enacted before the end of the 105th congressional
On February 24, 1999, a nearly identical version of the former House
Conference Report was introduced in the 106th Congress as H.R. 833,
the "Bankruptcy Reform Act of 1999." On March 16, S. 625 was introduced in the
Senate. [Note: On May 5, the House passed H.R. 833, as amended.] Although
different in some respects, both S. 625 and H.R. 833 contain credit counseling
provisions. If enacted, these provisions would establish new duties for the
United States Trustee Program, including the duty to "approve" credit counseling
services for use by individual debtors who wish to file for bankruptcy. This
article discusses the new duties for debtors and United States Trustees as set
forth in H.R. 833. It includes background information on credit counseling
services and debt repayment plans. It also highlights issues raised by this new
area of responsibility for the United States Trustee Program.
What is a Credit Counseling Service?
One need only peruse any metropolitan telephone directory to
discover the wide spectrum of organizations that advertise credit counseling
services. Credit counseling services are available from nonprofit organizations,
for-profit organizations, schools, churches, legal-aid organizations, and
attorneys, among other providers.
HR. 833 does not define "credit counseling service." For purposes of
this article, "credit counseling service" means an organization that exists and
functions to serve its consumer debtor clients and their creditors by attempting
to resolve debts through the formulation of individual debt repayment plans. The
credit counseling service seeks, when possible, reduction of the amount of debt
and reduction or elimination of fees and charges accrued on the debtor's
accounts. The debt repayment plan provides for payment to creditors over a
period of time during which creditors withhold enforcement of their claims.
Generally, clients are expected to stop using their credit cards and to refrain
from applying for any new credit during the term of the repayment plan. The
purpose of the plan is to settle the client's debts and repay creditors.
New Duties For Debtors and United States Trustees
A. Notice of Alternatives
As set forth in H.R. 833, an individual who wishes to file a
bankruptcy case would receive a written notice of alternatives containing: (1) a
brief description of chapters 7, 11, 12, and 13 and the general purpose,
benefits, and costs of proceeding under each chapter; (2) a brief description of
services that may be available from a credit counseling service; (3) warnings
about penalties for concealment of assets and false oaths or statements; and (4)
notice of the possibility of an audit. Unless the court ordered otherwise, an
individual debtor (or debtor's attorney or bankruptcy petition preparer) would
have to file a certificate with the court to show that the debtor received and
read the notice of alternatives. If the debtor failed to file a certificate
within 45 days after filing the bankruptcy petition, the case would be dismissed
automatically on the 46th day.
B. Credit Counseling Requirement
Under H.R. 833, individuals who wish to file a bankruptcy petition
would be required to undergo credit counseling through an approved credit
counseling service within 90 days before filing the bankruptcy petition. The
requirement would be fully waived only if the United States Trustee determined
that the approved credit counseling services for a district were not reasonably
able to provide adequate services for the additional individuals who would
otherwise seek such services. United States Trustees would annually review any
Under H.R. 833, if certain exceptions or exigent circumstances
applied, a debtor would be permitted to file the bankruptcy petition first and
then undergo credit counseling within 30 days post-petition. In either case, a
debtor would have to file with the bankruptcy court a certificate of compliance
from the credit counseling service and a copy of the debt repayment plan, if
any, developed through that service. Automatic dismissal would not occur if a
debtor failed to file a certificate from a credit counseling service pre- or
post-petition. Instead, the United States Trustee or a party in interest could
move to dismiss the case under 11 U.S.C. § 707(a), § 1112(b), § 1208(c), or §
1307(c), based on the debtor's ineligibility under § 109(h).
The credit counseling provision would require debtors to participate
in an individual or group briefing that outlines opportunities for available
credit counseling and helps them perform an initial "budget analysis." Although
the term "budget analysis" is not defined in H.R. 833, it appears to contemplate
an analysis of the debtor's income and expenses, including all secured and
unsecured debts and considering the debtor's available disposable income, to
determine whether the debtor can pay creditors through a debt repayment plan
without imposing undue hardship on the debtor or the debtor's dependents.
The United States Trustees would have responsibility for approving
credit counseling services. Approved services would be included on a list
provided to debtors and maintained by the bankruptcy clerk for each judicial
district. Only the listed agencies would be authorized to provide the
certificates of compliance that debtors must file with the bankruptcy court. The
credit counseling provisions would take effect 180 days after the date of
enactment of the Act.
How Do Credit Counseling Services Operate?
The United States Trustee Program has been working to become
acquainted with the nature and operations of credit counseling services in
anticipation of the need to develop criteria for approval of those services that
are equipped to render good service. The Program has met with representatives of
nonprofit credit counseling organizations and with executives of large,
multi-state agencies to learn about their policies and practices. Staff have
also examined the great variety of state laws applicable to credit counseling
During this process it became apparent that the prototypical credit
counseling service is part of a highly fragmented and competitive industry. The
industry's many organizations and autonomous units have diverse operational
policies and methods, charge different fees, and offer services of varying
quality. While most of the providers declare similar core purposes--to extend
and work out payment programs for individuals overloaded with debt--and most
appear to serve their clients effectively, they depend almost entirely for their
income not upon the debtors they serve but upon the creditors they pay. The
organizations receive funds from creditors in the form of a negotiated
percentage fee based on payments transmitted to the creditors through clients'
debt repayment plans. This negotiated percentage fee is known in the industry as
a "fair share" and may range from 0 percent to 15 percent of the payments.
Nonprofit organizations also may charge their debtor clients small fees that are
characterized as "donations."
There are several national associations that encompass most of the
nonprofit segment of the industry, but have no regulatory powers. There are also
numerous independent nonprofit providers--among them large-volume, multi-state
operations that operate through toll-free telephone numbers or the Internet,
rather than through face-to-face consultations with debtors in local offices. It
is estimated that more than 1,450 nonprofit credit counseling services operate
in the United States.
Although the members of the nonprofit associations may comply
voluntarily with the associations' internal standards, they are generally
unregulated by state laws or regulations. Most states exempt nonprofit credit
counseling services from their laws governing credit counseling providers.
Several states have no laws at all governing the operation of credit counseling
services. Only a few states have laws applicable to both nonprofit and
for-profit credit counseling services that provide for oversight and licensing
or registration of such services.
For-profit credit counseling organizations generally fall within the
purview of a majority of states' applicable laws and regulations, but the
quality and type of services they provide are variable. In some cases, the fees
they charge clients are higher than those charged by nonprofit groups.
Debt Repayment Plans
Nonprofit credit counseling services offer a variety of services
that may include counseling, debt repayment plans, and education. Typically,
when an individual contacts a nonprofit credit counseling service to inquire
about a debt repayment plan, he or she will be asked to provide information to a
credit counselor. This may take place in person, through a toll-free telephone
number, by fax transmission, by mail, or over the Internet. Such information may
include personal data, gross and net monthly income from salary, income from
other sources, assets, monthly living expenses, housing data, a list of
creditors, a list of debt obligations, and account and payment data. This
information is used to evaluate the client's financial situation to determine
whether a debt repayment plan is a viable option. Some providers require clients
to sign an agreement and other authorization forms. Credit counseling services
may be free to the client or may involve a monthly fee.
If a debt repayment plan is developed, it is likely to provide a
payment schedule tailored to the client's needs and ability to repay. The plan
may include reduced payments to creditors and reduced or waived finance charges,
late fees, and over-limit fees. Each month, the client transmits a payment to
the credit counseling service, which in turn transmits payments to creditors.
While most creditors pay a "fair share" to the credit counseling service, each
creditor credits the client's account with 100 percent of the payments. Clients
may receive regular reports on the status of their accounts. Significantly, most
credit counseling services handle only unsecured debt, so clients must continue
to make payments to secured creditors and other creditors not included in the
Most creditors do not stop charging interest during a debt repayment
plan. In addition, creditors may close or suspend a client's line of credit,
including credit card accounts, during a plan. Some repayment plans permit the
client to maintain one credit card, but almost all plans require the client to
agree not to apply for or incur any more debt during the plan.
Creditors may report to a credit reporting agency that a client is
not paying as originally agreed, even though the creditors have accepted a
reduced payment through a debt repayment plan. A debt repayment plan that
appears on a credit report could have a negative impact on a client's ability to
obtain credit, rent an apartment, or find employment in the future. This
negative information may remain on a credit report for seven years, whereas a
bankruptcy case appears on the report for 10 years.
When a client completes repayment under a plan, some creditors will
reestablish the client's credit, based on his or her ability to pay and payment
history under the plan. Some credit counseling services try to help clients
reestablish credit. It is not uncommon for a debt repayment plan to take four
years or longer to complete.
The United States Trustee Program has been advised that clients
typically have an 80 percent debt to income ratio when they seek credit
counseling from a nonprofit organization. About one third of all clients opt to
develop a debt repayment plan. Out of that one third, approximately 50 percent
of the clients who begin debt repayment plans complete their plans, while the
remaining 50 percent generally drop out within six months to one year. By
comparison, approximately 35 percent of all chapter 13 debtors complete
reorganization plans, with the balance of the cases being dismissed or
Another one third of all clients who seek nonprofit credit
counseling are able to work out their finances without a debt repayment plan.
About 23 percent of all clients need to take some other type of action, such as
seek part-time employment or address substance abuse. Approximately 10 percent
of all clients who seek nonprofit credit counseling file for bankruptcy.
Standards for Approval
If pre-bankruptcy consumer counseling requirements are enacted, the
United States Trustee Program will develop standards for approval of credit
counseling services throughout the country. It is anticipated that the approval
process will involve an application, which relies not only upon the applicant's
disclosures, but also upon verifications from other sources whenever possible.
This design seeks to maintain the integrity of the assessment process, while
limiting the work required of field offices, particularly given uncertainty over
whether Congress will provide funding for this additional responsibility.
The United States Trustees will apply the Program standards to
select and approve credit counseling agencies for listing in each judicial
district within their regions. Approval of a credit counseling agency will not
mean that the United States Trustee warrants the quality of the agency's
services or the success of its work. Rather, approval will mean that the credit
counseling agency meets the minimum standards for operational integrity
established by the United States Trustee Program.
Given that financially distressed people are very vulnerable and are
often targets for scams and unscrupulous operators, the challenge in developing
new standards will be to ensure that, to the extent possible, individuals are
not directed to inappropriate services. The credit counseling industry handles
approximately $6 billion annually, more than the amount distributed from chapter
7 and chapter 13 bankruptcy cases combined. Credit counseling services function
as fiduciaries because they handle and hold, for periods of time, substantial
funds belonging to others. They are necessarily high-risk operations, as the
possibility of defalcations is clearly present. The standards for approval must
provide for full protection of moneys that belong either to debtors or
creditors, while those funds are in the possession and control of credit
To ensure operational integrity, the standards for approval are
expected to require the credit counseling agency to use trust accounts, or other
such means, to preserve and safeguard funds; engage in regular oversight and
monitoring of all receipts and distributions of client deposits; and obtain
regular audits of the accounts from outside auditors. Of particular concern is
how credit counseling agencies cover possible losses through fidelity bonds or
insurance. Further, it is likely that the standards will address the need for
agencies to make periodic status reports to clients about payments to creditors.
They may also require an agency to make certain disclosures to clients,
including whether the agency is funded from the creditors' "fair share." General
quality of performance of credit counseling services will also be addressed in
the criteria for approval. In addition, the standards will address the need for
each agency to provide training for credit counselors and have experience in the
credit counseling business.
To retain the Program's approval, credit counseling services will be
required periodically to demonstrate continued compliance with the Program's
minimum standards and policies. Credit counseling services that do not meet the
criteria will be removed from the approved list provided to debtors. The
procedures and standards for approval and concomitant removal of agencies will
be set forth in an administrative rule to be adopted.
The implementation of a pre-bankruptcy filing requirement of credit
counseling for debtors, a new role for United States Trustees, and standards for
approval of credit counseling services, depends upon the enactment of bankruptcy
reform legislation that contains the credit counseling provisions. The
pre-bankruptcy filing requirement of credit counseling is a new concept in
bankruptcy law, creating new responsibilities for debtors and United States
Trustees. Under H.R. 833, credit counseling services would, in effect, become
the "gatekeepers" of the bankruptcy system because individuals would be
ineligible to file for bankruptcy unless they first obtained a certificate from
a credit counseling service approved by a United States Trustee.
The United States Trustee Program is working to ensure that debtors
are referred to credit counseling services that are dependable, responsible,
skilled in their work, and responsive to both debtors and creditors. The goal
will be to design a system that ensures that the counselors who are approved
will function with ongoing integrity and success. With that goal in mind, a
system can be structured that fulfills the intent of Congress and the needs of
debtors, creditors, the bankruptcy courts, the United States Trustees, and all
parties interested in the bankruptcy process.
Bankruptcy Basics - For Cases Filed on or after October 17, 2005 (pdf)
Basics - For Cases Filed before October 17, 2005 (pdf)
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