Few provisions in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have generated as much interest and inquiry as the new requirements that debtors obtain pre-filing budget and credit counseling and complete a post-filing instructional course in personal financial management (debtor education). The fact that credit counseling and debtor education are outside the traditional purview of the bankruptcy system, along with recent scrutiny of the credit counseling industry, have combined to produce a particular interest in the application of these new requirements.

Much of this interest focuses on how the U.S. Trustee Program (USTP) will carry out its new statutory duties to approve credit counseling agencies and providers of debtor-education courses for BAPCPA purposes. Under BAPCPA, individual debtors who file for bankruptcy on or after Oct. 17, 2005, must undergo credit counseling within six months before they file bankruptcy and must complete a debtor education course after they file for bankruptcy. With certain exceptions, an individual is not eligible to file for bankruptcy without completing credit counseling and is not eligible to receive a bankruptcy discharge without completing a debtor-education course.

BAPCPA directs the U.S. Trustee to approve credit counseling agencies and providers of debtor education courses according to criteria set forth in new 11 U.S.C. §111. It also directs the bankruptcy clerk to maintain a publicly available list of U.S. Trustee-approved credit counseling agencies and providers of debtor-education courses.

Approval Process

The credit counseling and debtor education requirements are consumer protection provisions designed to ensure that debtors enter bankruptcy with full knowledge of their options and exit bankruptcy after receiving education to help them avoid future financial distress. The U.S. Trustees' role as the entity approving qualified credit counseling agencies and debtor-education course providers will involve making difficult decisions on novel issues. In accordance with BAPCPA, the USTP has endeavored to implement the new credit counseling and debtor education provisions of the Bankruptcy Code in a manner that will deny approval to unscrupulous applicants, yet not erect unnecessary barriers that prevent conscientious applicants from offering important services to debtors.

On June 30, 2005, the USTP published the applications and instructions for approval as a credit counseling agency or provider of a debtor-education course. Information regarding the application process is posted on the USTP Web site at http://www.usdoj.gov/ust/bapcpa/ccde.htm. The site contains separate application forms and instructions for credit counseling and debtor education, as well as telephone and e-mail contact information for inquiries to the USTP.² This site is periodically updated with new information such as "Frequently Asked Questions" based on inquiries received. We encourage bankruptcy practitioners and other interested persons to review the application forms and instructions for a complete understanding of the approval requirements.

Employees at the Executive Office for U.S. Trustees are reviewing applications as they are received, with final approval to be made by the U.S. Trustee in the relevant region as mandated by the BAPCPA. By the time you read this article, the USTP will have announced approvals of some agencies and course providers. The USTP will continue to receive applications, as there is no application deadline, and it is anticipated that approved applicants will be added on an ongoing basis. BAPCPA directs that the initial approval is for a six-month period, with subsequent re-approval necessary to remain on the approved list. By the spring of 2006, the USTP will be reviewing the first group of approved agencies and course providers for re-approval.

Issues of Interest

Program staff have received a wide variety of inquiries from potential applicants. Questions range from "is there a deadline for application?" to "may a company doing business entirely outside of the United States be approved as a pre-bankruptcy credit counseling agency?" Issues that have arisen frequently include the following: Must a credit counseling agency offer debt-management plans? What constitutes nonprofit status for a credit counseling agency? What level of bonding is required? What constitutes a "reasonable fee" and lack of "ability to pay" for services? May attorneys and trustees be approved as credit counseling agencies or debtor-education course providers? How will credit counseling and debtor-education attendance be verified?

Debt-management Plans

Many credit counseling agencies offer debt-management plans (DMP) to their consumer clients, whereby the consumer makes a monthly payment to the agency for distribution to the consumer's creditors. Typically, the agency retains a small percentage or a set portion of the consumer's payments to offset some of the costs associated with administering the DMP. In many cases, when creditors are paid, the creditors make a contribution back to the agency. The amount of these payments, which are known in the industry as "fair share" contributions, are typically based on a percentage of the amount the consumer paid to the creditor through the DMP.

New §111 states that a credit counseling agency that handles consumer funds must have certain safeguards, but it does not require credit counseling agencies to handle consumer funds or administer DMPs to be eligible for approval by the U.S. Trustee. There are a number of agencies that provide consumer credit counseling, but do not handle consumer funds or administer DMPs.

Nonprofit Status

One of the requirements for approval as a pre-bankruptcy credit counseling agency is that the agency be "nonprofit," with a majority of the board of directors who are not employed by the agency and do not benefit financially from the outcome of a credit counseling session. For purposes of §111, an agency qualifies as a nonprofit entity if it provides sufficient proof that it is organized and operated as a nonprofit entity.

Nonprofit status is not restricted to entities that are tax-exempt under Internal Revenue Code §501(c)(3). IRC §501(c)(3) status, however, will generally be accepted as sufficient proof of an agency's nonprofit status for purposes of §111, although additional evidence supporting nonprofit status may be required under certain circumstances.

Bonding Requirements

The USTP requires credit counseling agencies that offer DMPs to provide a surety bond payable to the United States in an amount that is the lesser of two percent of prior-year disbursements from trust accounts, or the average daily balance maintained in all trust accounts for the six months before applying for approval. The bond must be for at least $5,000. A credit counseling agency may receive an offset or credit on the surety bond amount if it has obtained a surety bond or similar instrument in compliance with the requirements of the state or other jurisdiction for which it seeks approval.

Credit counseling agencies offering DMPs must also provide proof of adequate employee bonding or fidelity insurance in an amount equal to 50 percent of the surety bond amount calculated before any offset or credit received for state bonds. The employee bond or fidelity insurance must be for at least $5,000.

The USTP set these bonding requirements based on experience with private trustee bonding, as well as the USTP's examination of state regulation of the credit counseling industry. An earlier proposed bonding level was adjusted upon receipt of information regarding industry cash-management practices.

Attorneys and Trustees as Applicants

Some attorneys have inquired as to whether they are eligible to apply for approval as a credit counseling agency or debtor-education course provider. Attorneys are eligible if they meet the requirements set forth in §111. We caution, however, that state bar ethical considerations or other factors may limit an attorney's ability to provide these services and may restrict how the services are rendered.

To avoid the appearance of impropriety and actual or potential conflicts, private trustees may not provide credit counseling and may provide debtor education only in limited circumstances. Neither chapter 7 nor chapter 13 trustees may provide credit counseling, and chapter 7 trustees may not provide debtor education. Chapter 13 trustees may provide debtor education to debtors whose cases are assigned to them, if the requirements of §111 are met.

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Under BAPCPA, if a credit counseling agency charges a fee for counseling services, the fee must be "reasonable," and the credit counseling agency must provide services without regard to a client's ability to pay the fee.

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Reasonable Fee and Ability to Pay

Under BAPCPA, if a credit counseling agency charges a fee for counseling services, the fee must be "reasonable," and the credit counseling agency must provide services without regard to a client's ability to pay the fee. The USTP has not set a dollar amount for a reasonable fee. Information from the credit counseling industry indicates that counseling fees typically range from zero to $50.

Numerous variables may affect an agency's fee structure, including geography, types of services, administrative costs and alternate funding sources. To determine whether an agency's fees for pre-bankruptcy counseling are reasonable, the USTP will consider these variables as well as the fees customarily charged in the industry for similar services. Clearly, an agency's fees must bear a relationship to its costs of providing services. Setting a maximum fee could have the undesirable result of causing all fees to rise to that amount.

Credit counseling agencies must use their expertise to evaluate clients' "ability to pay" on a case-by-case basis. One factor to consider is the client's personal financial situation as reflected in the budget analysis required by the BAPCPA. The USTP will monitor the percentage of clients that agencies counsel for free or for a reduced fee, and will issue further guidance on this point.

Proof of Debtor's Compliance

BAPCPA requires consumer debtors to present certification of pre-bankruptcy counseling as a condition for filing, with certain exceptions. Proof of post-bankruptcy debtor education will also be required.

To help ensure the validity of the certification process, the USTP is developing a process that will allow it to review the issuance of credit counseling certificates and proof of debtor education completion. This will also aid the USTP in carrying out BAPCPA's directive to monitor approved credit counseling agencies and debtor-education course providers.

Court Procedures

The interim Federal Rules of Bankruptcy Procedure that have been approved by the U.S. Judicial Conference will permit the bankruptcy clerks to treat the failure to file a credit counseling certificate much as they treat a failure to file schedules. In most jurisdictions, this will likely result in the dismissal of the case.

Similarly, the interim Rules will allow the clerks to close a case without entry of a discharge if a debtor fails to complete a debtor-education course. The private trustees' role will include reviewing credit counseling certificates to ensure that debtors received counseling from approved agencies.

Conclusion

The USTP's criteria for approval of credit counseling agencies and providers of debtor-education courses may change as we learn from experience. The issues discussed in this article are simply examples, and we fully expect more questions to arise as implementation of the BAPCPA proceeds. Guidance and FAQs on emerging issues will be posted on the USTP's Internet site.

We invite comments on the new credit counseling and debtor-education requirements, and we encourage you to share your concerns. We hope that all participants in the bankruptcy community will approach BAPCPA's new requirements not only with an interest in fidelity to the law, but also with the dedication and spirit of cooperation essential to an honest, efficient and effective bankruptcy system.

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Footnotes

¹ The authors are on temporary detail to the Executive Office for U.S. Trustees, supervising the implementation of the approval process for credit counseling agencies and debtor education course providers. They wish to thank Jane Limprecht, Public Information Officer for the Executive Office for U.S. Trustees, for her assistance with this article. Return to article

² The telephone number for all credit counseling and debtor-education inquiries is (202) 514-4100. The e-mail addresses for credit counseling and debtor education inquiries are, respectively, [email protected] and [email protected]. Return to article