The Credit Counseling Requirement for Bankruptcy Filing
Before filing for bankruptcy, individuals are required by law to complete credit counseling. This step ensures that those considering bankruptcy are informed about their financial options and receive guidance on managing debt. Consult with a Los Angeles bankruptcy lawyer to learn about the credit counseling requirement, what it entails, and how it affects the bankruptcy process.
What Is Credit Counseling?
Credit counseling is a mandatory step in the bankruptcy process, required under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The goal is to provide debtors with financial education and help them evaluate whether bankruptcy is the best solution or if alternatives, such as debt management or repayment plans, are available.
To meet this requirement, individuals must complete a credit counseling session with an agency approved by the U.S. Trustee Program. This session typically lasts between 60 to 90 minutes and can be completed in person, over the phone, or online.
Why Is Credit Counseling Required?
The credit counseling requirement was introduced to ensure that individuals are fully informed about their financial situation and potential alternatives before filing for bankruptcy. Many people who file for bankruptcy are overwhelmed by their debts and may not be aware of other solutions that could help them avoid bankruptcy.
The purpose of the credit counseling session is to:
- Assess Your Financial Situation: The counselor will review your income, expenses, debts, and assets to get a clear picture of your finances.
- Explore Alternatives to Bankruptcy: The counselor will discuss potential options for managing debt, such as debt consolidation, a repayment plan, or negotiating with creditors.
- Provide Financial Education: You’ll receive advice on budgeting and managing your finances moving forward.
While the credit counseling session may highlight alternatives, it does not prevent you from filing for bankruptcy. If bankruptcy remains the best option for your situation, you will receive a certificate of completion, which is required to file your bankruptcy petition.
How to Choose a Credit Counseling Agency
To fulfill the credit counseling requirement, you must work with an agency that is approved by the U.S. Trustee Program or Bankruptcy Administrator in your district. The U.S. Trustee Program maintains a list of approved agencies, which you can find on the U.S. Department of Justice website.
It’s important to ensure the agency you choose is legitimate and approved, as only agencies on this list are authorized to provide the counseling session that satisfies the bankruptcy requirement.
What Happens During a Credit Counseling Session?
The credit counseling session is straightforward and designed to give you a better understanding of your financial situation. Here’s what you can expect:
- Gathering Financial Information: Before the session, you’ll need to gather details about your income, debts, assets, and monthly expenses. This information will be reviewed during the session to assess your current financial state.
- Discussion of Alternatives: The counselor will discuss different debt management strategies, such as debt consolidation, negotiation with creditors, or setting up a structured repayment plan. The purpose is to determine whether any of these options could help you avoid bankruptcy.
- Financial Education: The counselor will offer advice on budgeting and managing your finances to help you avoid similar issues in the future. This can include tips on managing spending, prioritizing debts, and saving for emergencies.
- Certificate of Completion: If bankruptcy is still the best option after the session, the credit counseling agency will issue a certificate of completion. This certificate must be filed with your bankruptcy petition and is valid for 180 days. Without it, your bankruptcy case will not proceed.
What If the Counseling Suggests an Alternative?
After the session, if the counselor suggests alternatives to bankruptcy—such as a debt management plan (DMP)—you are not required to follow their recommendations. Even if other options are presented, you are still free to proceed with filing for bankruptcy. The goal of the session is to inform you of your options, not to dictate the outcome.
Exceptions to the Credit Counseling Requirement
While the credit counseling requirement is mandatory for most bankruptcy filers, there are some exceptions. In rare cases, individuals may be exempt from completing the session if:
- Incapacity or Disability: If the individual is incapacitated or has a disability that prevents them from completing the session, they may be exempt from the requirement.
- Active Military Duty: Individuals on active military duty in a combat zone may be exempt from the credit counseling requirement.
- Emergency Filings: In cases of emergency, where immediate bankruptcy relief is necessary, the court may waive the requirement temporarily. However, the credit counseling session must be completed shortly after the emergency filing.
It’s important to note that these exceptions are granted in rare circumstances, and most individuals filing for bankruptcy will need to complete the credit counseling session.
Debtor Education: The Second Counseling Requirement
In addition to the pre-filing credit counseling session, there is another required course known as debtor education or post-bankruptcy financial management. This course must be completed after filing for bankruptcy but before the court grants a discharge of your debts. The purpose of debtor education is to provide additional financial literacy and teach debtors how to manage their finances after bankruptcy.
Much like credit counseling, debtor education is mandatory and requires a certificate of completion to be filed with the court. Failing to complete this course can result in your debts not being discharged, so it’s an essential part of the bankruptcy process.
Contact Wadhwani & Shanfeld
The credit counseling requirement is designed to ensure that individuals are well-informed about their financial situation and the available options before filing for bankruptcy. It helps debtors consider alternatives, such as debt management or repayment plans, that might help them avoid bankruptcy. However, if bankruptcy is the best solution, the counseling session will provide a clear path forward, ensuring you have the necessary education and resources to manage your finances.
If you’re considering filing for bankruptcy and need help navigating the credit counseling requirement, Wadhwani & Shanfeld is here to assist. Our experienced bankruptcy attorneys can guide you through every step of the bankruptcy process, including completing credit counseling and filing your petition. Contact us today for a consultation and take the first step toward financial relief.
Sources:
congress.gov/bill/109th-congress/senate-bill/256
uscourts.gov/services-forms/bankruptcy/credit-counseling-and-debtor-education-courses
