By Leslie E. Linfield

Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), there has been significant change in the practice of bankruptcy. One of the most noticeable changes came with the introduction of mandatory pre-bankruptcy credit counseling and post-filing debtor education.  Well, once again we are witnessing significant change within the debt management and insolvency field.

Recently, the Executive Office for United States Trustees (“EOUST”) released its long-awaited Final Rules for pre-bankruptcy counseling and post-filing debtor education. The Final Rules implement the credit counseling and debtor education sections of BAPCPA, which became effective back in late 2005.

Effective this April, credit counseling agencies and debtor education providers (“Organizations”) are now subject to the Final Rules,  which are based on proposed rules that were first released for public comment in 2008. Prior to April 2013, Organizations were subject to Interim Rules promulgated in July of 2006.

There are several significant changes from the Interim Rules to the Final Rules and Organizations will have to adjust how they operate in order to comply.  In an effort to assist Organizations in making the transition to the new rules, the EOUST recently hosted educational conference calls where they highlighted several significant regulatory changes.

These highlighted changes include organizational structure, such as board composition for nonprofit credit counseling agencies. Organizations are now expected to demonstrate that they have an independent board of directors. The majority of the directors/trustees may not be employed by the Organization nor can they directly or indirectly benefit from the outcome of the credit counseling services offered by the Organization. Additionally, Organizations are now prohibited from having a majority of the directors/trustees who are related to one another. The degree of relationship is defined per 11 U.S.C. § 101(45) and would therefore preclude family members out to the third degree from serving on the board.

Organizations are also now strictly prohibited from having any directors/trustees, officers, or supervisors who are also a relative of a US Trustee, chapter 13 trustee, or federal judge in a district where they have applied to provide services. This may prove a unique puzzle for some large Organizations operating nationally, but not necessarily an insurmountable problem if they have a good compliance program in place.

Another significant change includes a prohibition against any conduct or transaction, other than counseling, that generates a direct or indirect financial benefit for any members of the board, officers, supervisors, or any of their relatives. This new rule attempts to help Organizations avoid conflicts of interest within their business dealings. An example of how this rule works is that a member of the board who is also a trained credit counselor can earn a salary and not run afoul of this rule. However, the same board member who has a web design firm and offers to redesign the Organization’s website, even at or below market rate, would be in violation this rule.

Organizations are now very limited in what they can do with a debtor’s information and data. They are not allowed to sell a debtor’s information unless the Organization has the debtor’s express written permission and the EOUST has made it very clear that a “click through” box on the internet will not suffice. The Final Rules also prohibits commercial advertising and the sales of any financial products to debtors while they are receiving services.

Another significant change is the prohibition on referral fees. While the prohibition already existed, the Final Rules extend this prohibition  beyond cash payments and includes other forms of in-kind compensation for the referral of clients. The EOUST indicated that it has received numerous complaints regarding this issue. Examples include Organizations giving attorneys gift cards after referring a certain number of debtors or a lottery type system where attorneys could win prizes, with their chances increasing with each referral of a new debtor. This rule change should have an interesting impact on the marketing practices that have evolved through the years and will no doubt also be noticed by those who regularly attend legal conferences.

Along with the prohibition on referral fees and some new client disclosure requirements comes an additional obligation on Organizations. A practice has evolved where Organizations have entered into special fee arrangements with certain law firms. These firms receive a lower than published rate for credit counseling and debtor education services.  The EOUST questions if the clients in fact benefit from the actual discount or if the law firms are keeping the difference. To this end, Organizations must now add an additional disclosure for clients of these firms informing them of the rate the Organization actually charged the attorney for the services they are receiving (as opposed to the Organization’s published rate). According to EOUST, if the client has any questions about the difference in the fee, they should then contact the law firm directly. It is conceivable that as a result we may see more trustee inquiries at 341 hearings into what the debtor paid versus what the Organization received for counseling and education.

Speaking of fees, the Final Rules now also set a presumptively reasonable fee for both credit counseling and/or debtor education. Organization that charge $50 or less will now meet this test.  If an Organization wishes to charge more than $50 they must demonstrate to the EOUST that doing so is required due to its actual operating costs.

Fee waivers are also addressed under the Final Rules. The rule has been revised to add a rebuttable presumption that a debtor lacks the ability to pay the fee if the debtor’s current household income is less than 150 percent of the poverty guidelines, as updated periodically in the Federal Register by the U.S. Department of Health and Human Services. The guideline should be applied for a household or family of the size involved in the fee determination. This new guidance should assist both attorneys and Organizations in the efficient application of pro bono requests.

The EOUST spent some time on addressing quality of counseling. The Final Rules prohibit Organizations which offer their services by telephone or internet from providing diminished services to debtors simply because of the delivery method. In other words, the debtor should have as complete and thorough a counseling experience as if they had experienced the service in-person. To illustrate this under the Interim Rules, Organizations were only required to provide debtors with an analysis of the their financial condition, which very often was a regurgitation of the data the debtor gave the counselor. Under the Final Rules, Organizations must now give a detailed written budget analysis. According to EOUST, the difference between the approaches is that the budget analysis may not simply rehash the budget information the debtor provided, but must examine and assess their actual individual financial condition and provide recommendations specific to that debtor’s situation. No longer will auto-generated responses from a computer program be acceptable if they do not make logical sense for the intended recipients.

Debtor education providers also will need to ensure that quality and substance of the education programs they are providing meet the new standards set under the Final Rules. The most notable change for debtor education however is the inclusion of a testing requirement for courses provided by telephone or over the internet. The new rule will now require that Organizations directly communicate with debtors who fail to complete the test or who receive a score of less than 70 percent. The communication must be by phone if the course was by phone or can be by phone, email or live chat if the course was delivered online. Again, it is no longer acceptable to auto generate responses from a computer program, there must be actual live interaction with the debtors.

The Final Rule now requires that, to continue to be approved to offer credit counseling and/or debtor education, Organizations will have to establish to the satisfaction of the EOUST that they have provided adequate credit counseling and/or debtor education to those they have served.

There is no doubt with the publication of the Final Rules that Organizations will need to reinvent how they are offering bankruptcy related services. It is conceivable that the current field of approved providers may reduce in coming months. With decreasing bankruptcy filings and potentially increased compliance costs, many Organizations may deem that continued participation as an EOUST approved agency and/or provider is no longer cost effective.

It could be said that, “any change, even a change for the better, is always accompanied by drawbacks and discomforts.” (Arnold Bennett, 1867-1931) The Final Rules will no doubt cause discomfort for Organizations and may even be viewed as a drawback by some attorneys. However, in the opinion of this commentator, the Final Rules should be a beneficial change for all future debtors.

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Leslie Linfield is the Executive Director of the Institute for Financial Literacy in South Portland, Maine, and is a certified personal and family finance educator.