In the bankruptcy alphabet, the C stands for Credit Counseling. When the US Congress passed the Bankruptcy Reform Act of 2005, a major part of the new law was the requirement that Debtors (people who file bankruptcy) complete 2 credit counseling courses. The idea behind the requirement is that this is a “teachable moment”, so that people in too much debt can be taught enough to avoid getting into those problems again. The bankruptcy law requires that Debtors complete 2 counseling courses.
The first Credit Counseling course is the “pre-filing briefing”. You have to complete the course within 180 days of filing a bankruptcy case, and it must be done before you file your case, with a few rare exceptions. This is your “ticket in” to bankruptcy. This course takes about 60-90 minutes and covers many of a person’s options when they are in too much debt. These options include Debt Management Plans, Debt Consolidation and Debt Negotiation. This can be done in person, by phone, or online.
Debt Management Plans are set up by agencies that negotiate with creditors to lower your interest rates and payments. However, most of these plans cannot deal with secured debts such as homes and cars if you are behind. They also will not be able to keep the IRS from seizing assets, and will not be able to stop lawsuits.
Debt Consolidation usually involves taking a loan to pay the debts. Those loans are difficult to get for most debtors close to bankruptcy because their credit is already damaged.
Debt Negotiation is usually done after debts are in severe default, and in the hands of collection agencies, where you could try to negotiate, either on your own, or using an attorney, a reduced lump-sum payment on the debt to settle it. If you choose this option, you could get the creditor to “forgive” the debt, but you will get a statement of that amount at the end of the year, to report to the IRS, and you will be taxed on the amount forgiven.
You can choose among many agencies that give the required pre-filing briefing. Each agency has to be approved by the Office of the US Trustee. A full list of approved agencies is on their website: http://www.justice.gov/ust/eo/bapcpa/ccde/index.htm. When you make your choice, you need to look for agencies that have close ties, or are funded by the credit card companies, because those agencies are designed to try to get people into debt repayment or debt management plans. I usually give my clients a choice of a few agencies that are not focused on debt management plans, but rather on education only. (Hummingbird Credit Counseling and Education, Cricket Debt Counseling, and Institute for Financial Literacy). The courses cost up to $50.00 for individuals or married couples.
The most important thing to remember when talking to the counselors is that they are not lawyers, and cannot give legal advice on what is best for your situation. You need to be sure to consult with your attorney if you have any questions.
The second counseling course is called a “Financial Management Course”. This course is designed to educate people on how to manage their money. It is designed as a way to help people understand how to save and budget their money. This two-hour course covers things such as the differences between “wants” and “needs”, setting up an emergency fund, and how to set up a family budget. This would seem to better accomplish Congress’ goals of teaching people so they can avoid getting into trouble with their finances in the future.
This course is required after you file a bankruptcy case, and is required for you to get a “Discharge” or completion certificate from the Court. This is the “ticket out” of the bankruptcy. It can cost up to $50.00 for the second course. It can be done in person, online or by phone, and is usually in the form of a two-hour video or lecture.
Bottom line: Credit counseling is your “ticket in” required before you can file a bankruptcy, and “ticket out” of a bankruptcy. Your bankruptcy attorney should give you a list of reliable credit counseling providers.
Daniel J. Winter
LAW OFFICES OF DANIEL J. WINTER
53W. Jackson Boulevard