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Where Do Debtor Education Fees End Up? A Multi-Million-Dollar Industry

I wrote a few posts about the 2005 bankruptcy reform, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), but I left out one topic that doesn’t really address whether the law benefited debtors in New York bankruptcy. Specifically, what were some of the unintended consequences of the BAPCPA? One answer is the industry spawned by the BAPCPA’s debtor-education requirements.

The Bankruptcy Code requires debtors to complete a credit-counseling course before filing bankruptcy and a financial-management course before they receive a discharge. As I discussed in the post on the topic, these courses apparently don’t do a whole lot to deter bankruptcies or prevent future filings. On the plus side, one finding in particular was that the courses’ fees were fairly low as required by law, as reported in a Government Accountability Office report.

The question, though, is where did these fees end up? The answer, according to two law professors, is an irresponsible, multi-million-dollar industry.

The BAPCPA limits the pre-bankruptcy credit-counseling course to nonprofit corporations that the Justice Department approves. The post-filing financial management course, however, can be offered by for-profit entities, so in practice some operations split their debtor-education entities into two separate companies or they partner up with nonprofits.

Because nonprofits are required to disclose their financial records, the authors were able to analyze a group of nine approved providers’ earnings over many years. They allege a disturbing relationship between the nonprofit providers and for-profit business-support services that outsource telephonic debtor education to the Philippines and commit tax fraud.

One provider in particular, ACCESS Credit Counseling, responded to declining bankruptcy filings with call center outsourcing and an aggressive marketing campaign. In itself this isn’t a bad thing, but the authors point to apparently inflated expenditures designed to conceal revenue that would generally be taxed if ACCESS were a nonprofit.

For example, in its Los Angeles office, ACCESS employed half a dozen workers in 2012, costing nearly $400,000. Other debtor-education providers spent only $100,000 or less. Similarly, ACCESS claimed to have spent more than $700,000 on information technology when its competitors spent no more than $170,000 despite running larger operations. The researchers believe ACCESS used its nonprofit status to transfer its revenue to two for-profit entities, both related to ACCESS’s principals, in the form of contracting arrangements and management fees.

A monogram of the article can be found here (pdf).

Tax fraud and other unscrupulous business practices appear to be the unintended outcome of the BAPCPA’s debtor-education requirements. Fortunately, debtors are only moderately inconvenienced. If you are encountering financial difficulties, then you should talk to an experienced New York bankruptcy lawyer.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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