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Making Sense of Bankruptcy: What’s the Required “Credit Counseling”?

This is a usually an easy hoop to jump through, but do it with the right timing.


Here’s the sentence we’re focusing on today: 

“Credit Counseling” is usually a simple task, one imposed with a questionable purpose; in any event you must take care of it before you can file a personal bankruptcy case but not too early.   

What is the So-Called “Credit Counseling”?

The U.S. Bankruptcy Code says that, during the 180-day period before filing an individual bankruptcy case, you must get “from an approved nonprofit budget and credit counseling agency” “an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted… in preforming a related budget analysis.”

What’s So Simple about This “Counseling”?

It is a bureaucratic hurdle that’s easy to step over for just about anybody who wants to file bankruptcy. It’s quite a simple procedure usually done on the internet, or if you want by phone instead.  Essentially, you provide information on your debts, income, and expenses, and then you’re informed—no surprise—that you do not have enough income to meet your expenses. That’s about all there is to it.

The result is that you get a Certificate of Credit Counseling, usually by email, which enables you to file bankruptcy. Your attorney files the Certificate at the Bankruptcy Court at the same time as your bankruptcy petition.

What’s the Purpose of This Requirement? 

The supposed idea is to encourage people to consider alternatives other than bankruptcy, to not file bankruptcy unless really necessary. But, based on the history of the so-called “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” of which it was a part, arguably the real point was to make it just a little harder to file bankruptcy.

As for whether the law is achieving its purpose, the Government Accountability Office has said:

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.

Fortunately this “administrative obstacle” has turned out to be not much of a real obstacle.

Most Important is the Timing

But while taking care of the “credit counseling” requirement is relatively easy, its timing is critical. Since the certificate is good for only 180 days don’t do the “counseling” until you know that you will be filing bankruptcy within that time. But also don’t hold off too long, so that your bankruptcy filing doesn’t get delayed while you scramble to take care of the “counseling.” This is especially important if you are trying to stop a time-sensitive action by a creditor, such as a home foreclosure, vehicle repossession, or wage garnishment.   

Talk with your attorney to find the right “budget and credit counseling agency” to use. There are many dozens to choose from, and can vary widely in quality, convenience, and cost.  They do charge for their service, sometimes with a significant range in prices among them, but usually your attorney can direct you to one that is not expensive.


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