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“Credit Counseling” and “Debtor Education”

These two requirements are quite straightforward to accomplish, but can trip you up if you don’t take care of them when you need to.


“Credit Counseling”

Before you can file a personal bankruptcy case, you have to go through what is essentially a simple bureaucratic formality. But it IS a strict legal requirement that can cause unnecessary headaches if not done correctly. So it’s important to understand the “credit counseling” requirement. 

The U.S. Bankruptcy Code requires the following during the 180 days before filing a bankruptcy case. You must get, “from an approved nonprofit budget and credit counseling agency,” “an individual or group briefing (including… by telephone or on the Internet) that outline[s] the opportunities for available credit counseling and assist[s]… in preforming a related budget analysis.” (See Section 109(h) of the Bankruptcy Code.)

This “counseling” is really a simple procedure.  You provide information, usually online, about your debts, income, and expenses. You are then almost always informed that you do not have enough income to meet your expenses. The practical result is you get an emailed certificate stating that you’ve received the required “counseling.” That enables you to file bankruptcy.

The timing is critical. The certificate of completion is good for only 180 days. So don’t do the “counseling” unless you will be filing bankruptcy within that time. But also don’t hold off too long to avoid being pressed for time when it’s time to file bankruptcy.

What’s the point of this requirement? It’s to encourage people to consider alternatives other than bankruptcy. The Government Accountability Office has called that into question:

The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… 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.

“Debtor Education”

Beyond this “credit counseling” before filing your bankruptcy case, you must also complete “an instructional course concerning personal financial management” after filing the case.” You have to do this “debtor education” to get a discharge of your debts.

“Debtor education” is required in both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” cases. (See Sections 727(a)(11) and 1328(g) of the Bankruptcy Code.)

The most important thing about “debtor education” is to get it done, and on time.

The main goal of a Chapter 7 case is to get a discharge of your debts. Most Chapter 13 cases have that as a major goal as well—to discharge whatever debts are not paid during your case. If you do not complete the “debtor education” step, your bankruptcy case will close but you will not receive a discharge of your debts. You would have spent a lot of money and effort without accomplishing your main goal.

“Debtor education” is a 90-minute or so class is “designed to assist debtors in understanding personal financial management.“ This includes the appropriate use of credit, and budgeting skills. Like “credit counseling,” it can be done online, over the phone, or in person; in English or various other languages. When both spouses file a joint bankruptcy, both spouses must take this course. When you complete the course, you receive a certificate of completion which your lawyer files at the court.

Also like “credit counseling,” the service is provided by a long list of agencies approved by the U.S. Trustee’s Office. These agencies’ quality, convenience, and cost can vary widely, so get a recommendation about which one to use from your bankruptcy lawyer.

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