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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 imposes a duty on debtors to complete two debtor education courses, one as a condition precedent to filing for bankruptcy relief, and a second for later receiving a discharge of indebtedness. The stated purpose of this requirement was to have prospective debtors understand the potential alternatives to filing for bankruptcy relief with the goal of having some percentage of debtors settle their debt obligations outside of the bankruptcy system. Prior to BAPCPA, the Bankruptcy Code did not require consumer debtors to partake in financial education courses, and none were offered on a voluntary basis in conjunction with the bankruptcy system.
Consequences for Failing to Complete Credit Counseling
From the onset, the Office of the United States Trustee[1] took an aggressive position in seeking dismissal of bankruptcy cases in which the debtor neglected to strictly adhere to the statutory requirement. A review of bankruptcy court opinions from around the country reveals that most of the courts were strictly interpreting the law in those cases involving credit counseling (See U.S. Bankruptcy Court Eastern District New York[2], In re: Michal Swiatkowski, case number 805-70035-511; U.S.Bankruptcy Court[3] Southern District New York, Patrisha Osborne v. George Osborne, Case No. 11-38122).
It should also be noted that in some jurisdictions if the person filing the bankruptcy petition does not satisfy the pre-file credit counseling requirement, the court will strike the petition. Other jurisdictions will simply dismiss the case. It may seem that the striking or dismissing[4] of a bankruptcy petition would not impact the person who files a petition because both remedies should carry the same consequences regardless of semantics, however, these remedies do not have the same consequences.
Striking the Petition
Striking the petition will not limit the future availability to the debtor of automatic stay protection. A bankruptcy petition has the effect of staying “the commencement or continuation” of an action (judicial, administrative or any other type) and will prevent any claim against the debtor, including creditor claims, from continuing. When a court strikes a petition, the case has technically never commenced. This approach could have an immediate negative effect on the debtor because the automatic stay protection never attaches, allowing a bank to proceed immediately with a foreclosure and other actions.
Dismissing the Petition
If the court dismisses the case, the debtor will receive the invaluable automatic stay protection until the clerk enters the dismissal of the case because of the failure to satisfy the pre-file credit counseling requirement. The automatic stay will prevent the bank from pursuing foreclosure or repossession of assets. Unfortunately, dismissing the case may also prevent a future petition filed by the debtor from having the full protection of the automatic stay.
What is the Value of Required Credit Counseling?
In April 2007, the United States Government Accountability Office[5] (GAO) issued a fifty-five page report, at the request of Congress, reviewing the value of the credit counseling requirement. Its conclusion was that the value of credit counseling was not clear.
In requesting this investigation, Congress was concerned that the credit counseling requirement exposed consumers to abusive practices by credit counseling agencies and acted as a barrier to filing for bankruptcy. The GAO examined (1) the process of approving counseling and education providers; (2) the content and results of the counseling and education sessions; (3) the fees charged; and (4) the availability of and challenges to accessing the system. Pursuant to the terms of the report the GAO recommended:
“The Department of Justice’s U.S. Trustee Program, which is responsible for the new requirements, should (1) develop the capability to track and analyze the outcomes of prefiling credit counseling and (2) issue formal guidance on what constitutes a client’s “ability to pay.”
Difficulties with Credit Counseling Requirement in Long Island
Since its inception, there have been difficulties with the requirement[6] that Long Island bankruptcy filers obtain credit counseling including:
- Internet Access: Much of the information concerning the counseling is located online. This is a problem particularly for consumers who do not use or do not have access to the Internet, including many pro se debtors.
- English Language: It is difficult for limited English speakers[7] to find information about services in other languages. This is particularly true for languages other than Spanish.
- Cost of Counseling: The cost for credit counseling appears to differ based on the provider, but for those individuals who cannot afford their monthly bills, any amount can be difficult to pay.
- Fee Waiver Policies: The Executive Office of the United States Trustee (EOUST) has not provided an industry standard for fee waivers. There is considerable variation in fee waiver policies among the agencies and education providers. Further, for credit counseling agencies, policies on obtaining a fee waiver include exemptions for individuals whose household income is less than 150% of the federal poverty level (30.8%), those with pro bono legal representation (23.1%) and those who receive all or part of their income from social security or disability insurance (7.7).
- Individual Perceptions: Michael Sousa from the University of Denver Sturm College of Law sets forth in a 2013 Marquette Law Review[8] Article that only four out of the fifty-eight participants (6.90%) he interviewed for a study found the mandated education courses helpful in the ways Congress intended. Conversely, the vast majority of the participants interviewed for the study did not find the courses to be of any help to them, and the most common phrase for describing both courses was that they were a “waste of time.” A small segment of participants did indeed find the education courses to be helpful, albeit in different ways than from what Congress intended. For these individuals, the pre-filing credit counseling course proved helpful because it either affirmed their decision to file for bankruptcy or because the counseling session offered them a comforting voice that allayed any fears about the bankruptcy process.
Mr. Sousa further provides that while Sections 109 and 111 of the Bankruptcy Code “appear to be swimming in detail” they fail to address basic questions such as “[i]s the goal of credit counseling to determine whether the debtor should enter into a debt management plan and thereby not file for bankruptcy relief? Regarding the post-filing financial management course, it is true that the United States Trustee has mandated that the courses cover four substantive areas: (1) “budget development,” (2) “money management,” (3) “wise use of credit,” and (4) “consumer [protection] information.” Further, “should the course be designed to discourage the use of credit and to signal to debtors that they are overspenders and that overspending is deviant? Or should the course, instead, presume that debtors will, of necessity, re-enter the market for consumer credit after emerging from bankruptcy and endeavor to give them the tools for making wise and thoughtful credit decisions? Should the course encourage debtors to adopt specific practices, by promoting asset building or saving, for example, or should it be content rich but value neutral? Are the goals for each type of debtor the same, or can an approved provider offer different courses with different goals for different debtor audiences?”
While it remains uncertain what, if any, benefits are derived from bankruptcy credit counseling, it is necessary to comply with this and all other requirements established by federal and New York bankruptcy laws. In order to make certain that you understand all of the rules that apply to your situation, it is important to speak to a greater Long Island and New York area bankruptcy attorney. Call the office of Ronald P. Weiss today at (631) 296-0361 in order to discuss the specifics of your financial situation and possible bankruptcy solutions.
References:
[1] http://www.nyeb.uscourts.gov/office-us-trustee-0
[2] http://www.nyeb.uscourts.gov/sites/nyeb/files/opinions/opinion_mlc_06-11-16.pdf
[3] http://www.nysb.uscourts.gov/sites/default/files/opinions/221724_52_opinion.pdf
[4] http://www.tjeffersonlrev.org/sites/tjeffersonlrev.org/files/32-02-03-Eaton.pdf
[5] http://www.gao.gov/new.items/d07203.pdf
[6] https://www.nclc.org/images/pdf/bankruptcy/bankruptcy_burdens.pdf
[7] https://www.debtorcc.org/new-york-pre-filing-bankruptcy-credit-counseling.aspx
[8] http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=5193&context=mulr
