In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA),1 commonly referred to as the New Bankruptcy Law. This law set out to make it more difficult for individuals or married couples to file for bankruptcy by complicating the bankruptcy process with additional requirements. One new requirement for both Chapter 7 and Chapter 13 bankruptcy was that filers must undergo credit counseling by consulting with a nonprofit agency approved by the federal government.2
Technically, credit counseling must occur at two different stages of a bankruptcy case – prior to filing for bankruptcy (commonly known as the “Initial Session) and also prior to discharge of qualified debts (known as the “Second Session”). Specifically, the law states the following regarding the requirement for the initial session of credit counseling:
“An individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) 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 such individual in performing a related budget analysis.”
Even after attending the initial credit counseling, filing a petition, and going through the entire bankruptcy process, bankruptcy filer will have to undergo a second session, which is a financial management class commonly referred to as “predischarge counseling” or “budget counseling.” This course must also be provided by an approved agency and you must file your certificate of completion with the court.
These requirements apply to both liquidation3 and reorganization4 bankruptcies though the law does set out some very specific exceptions, including:
In the large majority of cases, filers will have to meet the counseling requirement and file proof of their counseling session with their bankruptcy petition and prior to discharge. If they fail to do so, the court may deny the bankruptcy discharge under the law.5 Whether you inadvertently or purposefully fail to meet the credit counseling requirements for your bankruptcy, the rules can be harsh. For example, a court could dismiss your bankruptcy case without a discharge, leaving you in possibly a worse situation than you were prior to the bankruptcy filing because you now owe more on your debts.
In light of these potentially harsh consequences and requirements and the fact that each counseling course can add $50 to $100 in fees to a bankruptcy case, questions exist about the effectiveness of credit counseling before a bankruptcy filing and whether this requirement should persist.
The purpose of the credit counseling requirement
When legislators enacted BAPCPA, they included the pre-filing credit counseling requirement in an effort to educate potential filers of their options for financial management. This was well-intended to potentially help people avoid unnecessary bankruptcies and the long-term effects of such. The sessions last approximately 90 minutes and cover the following topics:
Bankruptcy can have a lot of effects on a filer’s life, including your credit, your ability to obtain financing for a home, car, or school, and more. The supposed hope is that, through counseling, people may identify any possible ways they can regain control of their finances without filing for bankruptcy.
The second debtor education counseling session has a different purpose and looks to the debtor’s future beyond bankruptcy. The purpose is largely to teach financial skills to avoid any subsequent need for bankruptcy. Some topics covered in this second session can include:
“The value of the counseling requirement is not clear.”
As part of the New Bankruptcy Law, Congress agreed to study the effectiveness of the consumer credit counseling requirements for 18 months following the enactment of BAPCPA. If the requirement was found to not have significant effects, the credit counseling requirement might have been removed from the bankruptcy process. The results of the study conducted by the U.S. Government Accountability Office (GAO)6 were inconclusive, however, and the report stated the that “the value of the counseling requirement is not clear.” The GAO simply recommended to Congress to keep the requirement in place and implement a tracking process to identify how many filers who went through the consumer credit counseling go on to file a subsequent bankruptcy in the future.
Reasons why credit counseling in a bankruptcy filing is ineffective
There are many reasons why credit counseling does not do much to assist people who are considering filing or who have already filed for bankruptcy. For example:
An interview conducted for a paper published in the Marquette Law Review7 gives one example of a filer who felt there was little benefit in the required counseling. The man used a budget and did not overspend and had to file bankruptcy because of large medical bills from an unexpected illness. Therefore, he felt he learned no new information regarding financial management. In many cases, if a filer has already fully decided to file for bankruptcy, they simply go through the motions without really paying attention to the counseling.
Another reason why credit counseling may be called into question is the credentialing of the companies and agencies providing this service. Due to the new requirement coming into effect combined with the downturn of the economy and increase in bankruptcy filings, there was suddenly a much larger market for accredited counselors that did not previously exist. Therefore, many individuals who jumped on the credit counseling wagon, so to speak, may not be as adept in providing individualized and beneficial counseling that can actually assist people who are in dire financial situations and are considering bankruptcy.
There are some benefits to credit counseling
Some people do find value in the pre-bankruptcy consumer credit counseling. Some examples of benefits regarding credit counseling are as follows:
In one study titled “New Burdens But Few Benefits,”8 researchers found that there was definitely room for improvement to make credit counseling a more beneficial requirement for bankruptcy filers and presented suggestions for the improvement of the program. Until such steps are taken by the government to enhance the quality and content of bankruptcy credit counseling, this step may simply be an administrative requirement to receiving the financial relief you need.
Whether a particular person will find the credit counseling to be beneficial or simply an administrative obstacle, it is important to ensure that the requirement is met to ensure successful approval of your bankruptcy without unnecessary delays.
Contact a Long Island bankruptcy attorney today to discuss your financial circumstances today
People who are experiencing financial problems should speak with a qualified bankruptcy attorney who is familiar with New York bankruptcy law as soon as possible. In many instances, bankruptcy can help protect property from creditors and can reduce or even completely eliminate debts. Because filing for bankruptcy is a complicated matter, it is highly advisable for anyone considering filing for bankruptcy to do so with the assistance of an experienced lawyer. An attorney will be able to ensure that all of your filings are complete and accurate, that you comply with all procedural requirements such as credit counseling and debt counseling, that you take advantage of all exemptions that may be available, and that you receive your discharge as soon as possible.
New York attorney Ronald D. Weiss has been helping individuals who are struggling with financial problems find solutions since 1987 and is dedicated to obtaining the best possible outcome for each client he represents. To schedule a free consultation with Mr. Weiss, call our office today at 631-271-3737. If you would prefer to reach the firm via email, please fill out and submit our online contact form.
7Just Punch my Bankruptcy Ticket: A Qualitative Study of Mandatory Debtor Financial Education, http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=5193&context=mulr