The Bankruptcy Credit Counseling Requirement

Jun 2, 2021 | Bankruptcy

Is there anything more riveting than a credit counseling class? Accountants, bookkeepers, tax preparers and the like often discuss these classes at dinner parties and other social gatherings. Those with insomnia often enjoy attending a virtual class from the comfort of their favorite recliner – and off to snoozeville they go.
In all seriousness, credit counseling is probably last on most people’s lists of fun things to do. It’s right up there watching corn grow or paint dry. But, it’s a requirement for bankruptcy nonetheless, so if you want to take advantage of bankruptcy, you might as well embrace the mandatory credit counseling classes for what they are – an absolute necessity.

Why are these classes required in the first place, and what exactly are they like?

Where did they come from?

There was a time, many moons ago, when you could file bankruptcy without taking a credit counseling class. It was a glorious time when it was easier to qualify for bankruptcy in the first place. There were fewer restrictions on income and the kinds of property you could keep and still file for bankruptcy. And there certainly were no credit counseling classes.

Back in 2005 there was a push by senators from Delaware for a change to the bankruptcy laws. Delaware is a state where a disproportionate amount of businesses are incorporated because of the state’s business friendly tax code. It behooved senators there to pass legislation that would benefit these large businesses. So legislation was spearheaded that would eventually become the new bankruptcy law of the land.

Ultimately, the new rules made it more difficult for the average person to file for bankruptcy. You’ve probably read about the Means Test. That test added restrictive layers to qualifying for Chapter 7 bankruptcy. The aim of the test was to prevent people who could otherwise afford to pay off their debts from filing for bankruptcy. The kind of property you owned also became an integral part of qualifying for bankruptcy. A big one was the restriction on what kind of vehicle counted as an expense. For example, even though you owned a $50,000 vehicle, you couldn’t count that entire monthly expense toward your overall expenses for the purpose of qualifying for bankruptcy. Only a fixed, maximum amount could be counted. It was based on the cost of a “reasonable” vehicle, not a Ferrari. These standards and more, still are part of the bankruptcy law to this day.

This is where the credit counseling component comes in. It was created in 2005 to deter people from filing for bankruptcy if they didn’t really need to, and to give people tools who end up filing to keep from having to file for bankruptcy again in the future. Nobody wants to get into so much financial trouble that they end up filing for bankruptcy twice. That’s the whole idea of credit counseling. If you learn a thing or two about credit and how to use it (or how not to use it) carefully, you’ll stay out of trouble in the future. No more bankruptcy for you – not in this lifetime at least.

What does credit counseling teach?

The two credit counseling classes each teach something a bit different. They are both pertinent to where you are in the process of filing for bankruptcy.

The pre-filing class has to be taken (surprise!) before your case is filed. This is the class that nobody forgets to complete because if you do, your attorney is probably not going to file the case for you.

A big focus of the pre-filing class is on whether or not you should file bankruptcy in the first place. After all, if your debt is low enough and your income high enough, you may be able to create a repayment plan that will allow you to gradually repay your debts. Even if it’s pretty obvious that there is no way you’ll be able to pay off your debt, you’ll have to do this part of the class regardless. The bankruptcy court simply wants to make absolutely sure you really, really need to file for bankruptcy.

The way the credit counseling class makes the determination of whether or not bankruptcy is superior to some kind of payment plan is primarily by analyzing your income, expenses, and debts. Therefore, in preparation for this class, it’s a good idea to have a minimal amount of personal, economic information available. It doesn’t hurt to have a pay stub, bank statement, and a rough idea of the total amount of your debt.

The post-filing credit counseling class has to be completed shortly after your case is filed. This is the class many people forget to complete. Once your bankruptcy filing is behind you, it’s easy to feel as though you’ve already reached the end of the bankruptcy road. Don’t make that mistake. If you don’t complete the second class and make sure that the bankruptcy court receives your completion certificate, your case could be dismissed!

So what exactly does this second credit counseling class cover?

As you might expect, the second credit counseling class deals with moving forward with your financial life after your bankruptcy. The chief goal here is to ensure that you don’t end up in a situation where you’ll have to file bankruptcy again. It’s best if bankruptcy is a one-and-done situation.

In order to achieve the goal of staying out of financial trouble, the second course focuses on intelligent financial management. You’ll learn about rebuilding your credit (something your attorney might help you with as well), and you’ll get tools for creating a budget so that you can live within your means and even save for your future.

How do I take a credit counseling class?

Depending on where you live, there are usually many agencies approved by the bankruptcy court to teach credit counseling. You will want to make sure that the agency you choose is approved for counseling in your area. It’s also not a bad idea to check out a few different ones to make sure you are comfortable with their program, and of course, their price. Your bankruptcy attorney will likely recommend an agency or two, but you are welcome to choose any approved agency.

The classes are usually offered in person, over the phone, and online, but the vast majority of people do the online version of the course. In fact, many agencies are available exclusively online. There are two classes you must attend – one is taken prior to filing and one after your case is filed. Each one typically lasts about 90 minutes. If you don’t complete both credit counseling classes in a timely fashion, your bankruptcy case will be dismissed by the court.

You will be charged a fee for each of the two classes. This fee varies from agency to agency, but typically it will be around 25 dollars for each class. Depending on your jurisdiction, you may be able to petition the court for a waiver of these fees, but this is fairly unusual given the low cost of these classes.

How does the court know I’ve completed credit counseling?

When you complete your credit counseling class through the approved counseling agency, they will provide you a certificate of proof (usually digital) that you will give to your attorney so that he or she can file it with the court. This certificate proves the completion of your course, and you will need two, separate certificates – one for each of the two classes you must take. Both certificates must be filed with the court within the approved time frame or your case may be dismissed. Don’t ignore reminders from the court or from your attorney about taking these two courses. They are critical to the success of your case.

Does credit counseling help?

As easy as it might be to not take these two courses seriously, they can be a valuable tool for you. Many clients report that these classes have taught them at least one or two things that were very valuable to them, if not more. It’s rare to hear that someone feels these classes are a total waste of time.

The first course is important because it helps you know if bankruptcy really is the right option for you. Obviously, the easiest way to know this for sure is by consulting with a bankruptcy attorney, but this course at least acts like a second opinion for you.

The second class is the most valuable of the two. Knowing how to move forward with your financial future without getting back into trouble is extremely valuable. Just learning how to make a budget and stick with it will almost guarantee that you won’t have to file for bankruptcy again in the future.

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