Bankruptcy Law

What Is Bankruptcy Credit Counseling? Is It Mandatory?

Bankruptcy Credit Counseling

If you are struggling with debt-related issues, we have your back. Overwhelming debt is a major part of an American’s life. Not all of us come from wealth. Life has not been fair to the most of us. 

Education loans to pay medical bills or care for loved ones are a constant factor in our lives. However, that does not mean we will let debt ruin our lives. Bankruptcy does not have to be the end for you. Whether it is a huge credit card bill or unprecedented medical expenses, filing for bankruptcy can be your way out.

What Is Bankruptcy?

Bankruptcy is a legal process and a declaration. It allows a person to declare that they are overwhelmed by their financial difficulties. 

  • When a person files for bankruptcy, they declare that they cannot meet their financial obligations. This declaration notifies both the government and its creditors.
  • The primary goal behind a bankruptcy claim is to give the person time to plan and manage their repayment plans.
  • Insolvency or going broke can be quite stressful for some. Over the years, we have seen multiple people take their own lives because they feel they have no other way out. 

This is why bankruptcy is a safe space for these individuals to get back on their feet and repay their creditors.

Bankruptcy Credit Counseling

Bankruptcy credit counseling is a very important step when filing for bankruptcy. The aim is to help individuals and families going through this distressful period. 

The help can be in the following forms:

  • Financial knowledge required to make infant decisions.
  • A clear knowledge of the path and options open to them
  • A brief guide to where each path leads into their financial future.

A person going through the process of filing bankruptcy is as it is in a very precarious situation. They need all the help they can gather. 

Therefore, bankruptcy credit counseling is a comprehensive guide that will help them navigate the complicated legal process.

How Is Bankruptcy Credit Counseling Legally Defined?

Credit counseling for bankruptcy can be legally defined as a counseling program. It is a mandatory financial counseling program that helps one before they can file for bankruptcy.

  • As the program’s name suggests, its primary purpose is to judge where the person stands financially. It helps them go through their current financial situation. The program also gauges if there are alternatives to the bankruptcy claim.
  • After the person has gone through the necessary counseling procedures, they will have an understanding of the Bankruptcy Abuse Prevention and Consumer Protection Act and the bankruptcy code.

This counseling process will empower all debtors to make an informed decision.

What Federal Laws Does Bankruptcy Credit Counseling Deal With?

The primary federal law that bankruptcy credit counseling deals with is the United States Bankruptcy Code.

  • The two main chapters under the score are Chapter 7 and Chapter 13. Organizations like citizens can go bankrupt, too. These chapters deal with two different types of approaches to bankrupt citizens. 
  • Each has its own eligibility criteria, processes to follow, and outcomes. Each chapter has different ways to protect bankrupt individuals.

Is Bankruptcy Credit Counseling Mandatory In The US?

Bankruptcy credit counseling for bankruptcy is indeed mandatory in the United States. The certificate of completion that you received after the counseling session is one of the requirements to file a petition.

What Law Makes Bankruptcy Credit Counseling Mandatory?

The Bankruptcy Abuse Prevention and Consumer Protection Act has been a federal law since 2005. It gives a complete guide to the United States bankruptcy system. 

  • Under this act, credit counseling is mandatory before a person files for bankruptcy under Chapter 7 and Chapter 13.

Bankruptcy Abuse Prevention And Consumer Protection Act

Under this act, all debtors must complete counseling courses from government-approved agencies. Only after they have completed the course can they file for bankruptcy.

  • A person applying for liquidation bankruptcy under Chapter 7 and reorganization bankruptcy under Chapter 13 has to go through this session.
  • All debtors have to obtain a certificate of completion from a government-approved credit counseling agency. They must submit the certificate and their bankruptcy petition in a court of jurisdiction.
  • There are some exceptions where the court may grant an exemption to the debtor. The circumstances are, however, limited and require proper documentation from the court to back it up.
  • In addition, if a person has to file for bankruptcy under Chapter 13, they have to complete a financial management course. Only after they complete the course will they receive a discharge of their debts.

This type is mandatory under US law so that a person receives guidance on proper financial planning post-bankruptcy.

Chapter 7 Of The Bankruptcy Code

This chapter primarily deals with liquidation as a part of bankruptcy.

Who are the people that this chapter deals with?

Chapter 7 of the bankruptcy code applies to partnerships, business entities, individuals, and corporations.

  • If you want to qualify under this chapter, you will have to pass an assessment called the means test. Through this examination, the government will evaluate your income and expenses. 
  • The government can arrive at a decision that you are capable of after repaying your debts. In this condition, you will have to repay them under professions of Chapter 13 of the bankruptcy code.
  • Chapter 7 primarily deals with the process of liquidation. The liquidation office will have to sell your assets to pay off the creditors. 

If you are a business or a corporation, you will see to exist and operate after this happens.

What Does Credit Counselling Say About Chapter 7?

If you undergo bankruptcy credit counseling, they can guide you through the process. This is how the process will look like.

First, The Person Under Debt Or The Insolvent Files For A Bankruptcy Petition.

Through this, the process of bankruptcy begins. 

  • As soon as the filing is complete, an automatic stay order goes into force against all actions from creditors. 
  • This step is essential because creditors can often become violent in the process of debt collection.

The Court Appoints A Trustee. 

The Trustee goes through the financial records and begins the liquidation process. 

  • The proceeds from liquidation go to paying off the creditors. 
  • Some assets can be treated as exemptions, and that protects them from being sold.
  • The debtor is free to go after the liquidation process, and payment is complete.

Credit Counselling And Chapter 13

If you are going through bankruptcy credit counseling, you can also get information about Chapter 13. 

  • This is the chapter that is designed for people who have regular income. They gradually want to repay their debts over an extended period of time.
  • However, there are limits to these debts to qualify under Chapter 13. 
  • The total unsecured debt that you have taken cannot exceed a certain amount.

What Does Credit Counseling Say About The Process?

Bankruptcy credit counseling will tell you to file a petition under Chapter 13, just like they did in Chapter 7.

  • The Automatic stay order goes into force just like it did in Chapter 7. This step is essential because, in both cases, debtor relief is essential.
  • The debtor makes good use of the relief period to come up with a proper repayment plan. 
  • This plan will outline how they proposed to pay the creditors in 3 to 5 years. After the court approves of this plan, the process of payment begins. 
  • The debtor keeps on making regular payments to the Trustee the court has appointed. After the debtor has successfully paid off all debts, the court discharges them.

What Differences Will Bankruptcy Credit Counselling Point To?

This is an overview of the differences your bankruptcy credit counselor will point to. 

  • The first difference they could point to is that Chapter 7 typically leads to a discharge of the unsecured debt. This can include credit card debts, medical bills, etc.
  • This means that debt such as alimony, student loans, some sorts of taxes, and child support cannot be discharged under this chapter.  
  • Assets that are not exempted under this chapter may be lost to the creditors.
  • Chapter 13, however, allows the visuals to keep their assets. All the debtors have to do is come up with a structured plan of repayment. 
  • Mortgage areas, car loans, and other types of secured debts fall under the repayment plan.
  • There is liquidation of Assets of the debtor in Chapter 7. Based on this, the eligibility criteria are also different. 
  • Chapter 7 also leads to the discharge of unsecured debts. In Chapter 13, debtors can keep their Assets and instead come up with a repayment plan. 
  • There is no discharge of debts in Chapter 13 of the bankruptcy code.

Whether you file for bankruptcy under Chapter 7 of the code or under Chapter 13 of the code, a fresh start awaits you. 

  • Bankruptcy credit counseling is going to help both the debtor and the court. All parties get an understanding of the best course of action.
  • Did you know that companies don’t just file for bankruptcy when they are actually bankrupt? 
  • This means when a company is dragged into a legal battle for faulty services, the court orders them to pay damages. 
  • They often make false bankruptcy claims to get out of these million-dollar settlements. This is why a major chunk of the decision is left to the law.
  • After the counseling, the court may decide that bankruptcy is, after all, not a good option. This especially happens when your income is good enough to repay your debts.
  • Bankruptcy credit counseling is very important for anyone wanting to file a claim under either chapter. 
  • Even if your income is insufficient for repayment, these counseling sessions are mandatory for you.

Who Provides Credit Counseling For Bankruptcy?

The United States Trustee program maintains a long list of bankruptcy counseling providers. These are all approved by the government.

If you want to apply for bankruptcy, you will have to go through a program offered by a government-approved credit counseling agency. The Agencies are situated all across the country. The services are in person, online, or over a phone call.

How To Find A Bankruptcy Credit Counseling Agency Near Me?

As we at SimplyLawZone always say, a Google search is mandatory. It is true that not all agencies are government-approved. 

  • However, approved ones also have user-friendly websites you can access online.
  • The official website of the US Trustee program is a part of the United States Department of Justice. 
  • It has the power to oversee bankruptcy cases within the jurisdiction of the United States.

The official website URL is: LIST OF CREDIT COUNSELING AGENCIES APPROVED PURSUANT TO 11 U.S.C. § 111 | UST | Department of Justice

This website provides a detailed list of all credit counseling agencies located in the United States by state and district. Choose one that is nearest to your location.

Bankruptcy Attorney

If you are facing problems while looking for an agency, feel free to contact a bankruptcy attorney. 

  • Look at legal directories and make Google searches online to find bankruptcy lawyers near your location. They have a ready list of government-approved counseling agencies.
  • If you do not have the resources to hire a lawyer, do not worry. Going through the process of bankruptcy can be stressful as it is. It is understandable if you do not want to spend more money hiring an attorney. 
  • Legal Aid and Pro Bono services can help you out. These bankruptcy attorneys practice free of charge or at lower charges to help the financially challenged population.
  • Be sure to check out online bankruptcy credit counseling options. If you are dealing with too much at the moment online consultations can be a God-send. The Agencies under the US Trustee programs also offer online consultations for people who need them.

Lastly, before you finally go for a credit counseling agency, check if the United States Government actually approves them.

What Happens After You Have Chosen A Credit Counseling Agency For Bankruptcy?

Credit counseling is a session that is specifically designed to give individuals financial education related to bankruptcy. 

How Long Does Bankruptcy Credit Counseling Last?

Considering all factors, a session can be lost anywhere between 60 minutes to 90 minutes. It can cover various topics that keep the debtors financially informed about their future. 

What Happens During The Sessions?

One of these sessions ideally begins with a financial assessment of the circumstances of this individual. 

  • Here, an expert on the subject will review your finances. To get a better idea of your situation, they will ask you multiple questions about your expenses, debts, assets, and income.
  • Next, your counselor will create a budget plan. This will not down your monthly income and expenditures. 
  • This basically helps you understand how you will manage the finances properly. The idea is to help you pay back the creditors and get you back on your feet eventually.

After This Comes The Difficult Part!

Your counselor will talk in detail about the types of debts you have. The counselor will come to a conclusion about the secured and unsecured parts of it. 

  • They will talk about the total amount payable to multiple creditors, the severity of the debt, and your financial state.
  • It is through these sessions that you can explore your alternative to filing for bankruptcy. 
  • The primary discussion is on matters such as debt management plans, negotiations, and consolidation.
  • Your Counselor is responsible for giving you financial education relevant to your circumstances.
  • This includes education on budgets, savings, and financial management. 
  • If you are filing for bankruptcy under Chapter 13, they will also help you come up with a proper repayment plan.
  • These counseling sessions are responsible for informing you of the consequences. 
  • Your Councillor will explain all potential consequences of bankruptcy to you in detail. 
  • They will tell you how bankruptcy can alter your worth, credit score, credit reports, etc.
  • When filing for bankruptcy under Chapter 13, your Councillor must approve of your choices. 
  • This is only possible when they assess your ability to repay and come up with a relevant repayment plan.
  • These sessions also give you a chance to ask your doubts and questions on the subject. 
  • Consider these counseling sessions an opportunity to learn and grow.

Once you have successfully completed the session, you will receive a certificate. The certificate holds great value because, during the procedure, the bankruptcy code will ask for it. It is so important that you cannot file your bankruptcy petition without it.

Can You Be Exempted From Bankruptcy Credit Counseling?

In certain situations, the court may find a debtor to be eligible for an exemption. In other cases, the court may allow an extension for these counseling requirements. 

  • For an extension, the debtor has to complete the counseling session within the given time frame.
  • Whether you are eligible for an exemption or an extension depends on your particular circumstances. However, let us look at some cases where the court usually allows exemptions or extensions.

If A Person Needs To File Bankruptcy On An Emergency Basis

These are the cases of emergencies where the person might lose their assets to a foreclosure. Here, the court may allow an exemption. However, most frequently, the courts ask the debtor to eventually complete the session within a certain time period.

Physical And Mental Disability Leads To Exemption

Bankruptcy can happen due to various reasons. It can happen when a person physically or mentally loses the capacity to work and pay off their bills. These are the cases that are eligible for an exemption. The family or the person’s legal representative has to give proper medical documentation as proof of their disability.

When A Person Has To Go And Serve In The Military

These are cases when a person is on active duty in a high combat zone or hazardous area. In such cases, the court may allow an exemption. The extension of exemption can last up to 450 days after their service has ended.

Debtors Who Do Not Speak English Well

If a debtor cannot speak English, they can ask for an exemption or an extension from the court. The court can also ask for help in their primary language, but that may take some time.

If A Debtor Has A Lack Of Agencies In Their Locality

It is possible that a debtor stays in a rural area with no approved government Agencies nearby. In such cases, the court may grant an exemption. However, the court may also ask the person to schedule an online session.

If There Is An Illness

These are cases when the debtor is dealing with a temporary illness that makes them unable to attend counseling. The court may allow an extension of the counseling period in such cases.

Thus, in cases where debtors find it completely impossible to attend counseling, the court may allow it. However, if it is even remotely possible to attend these fashions online or over the phone, the court will allow an extension instead.

Final Word: Why Is Bankruptcy Credit Counselling Important?

When you are about to make a bankruptcy claim, the last thing you want to do is to complicate the process even more.

This is why credit counseling is important. It gives a debtor a complete financial evaluation of their situation.

Let us look into the importance of credit counseling for bankruptcy.

Credit Counseling Will Help You Evaluate Your Financial Situation

You get a thorough report of where your finances stand. Your counselor will go through debt assets, income, and expenses. They will come up with relevant repayment plans so that your job is easier.

Financial Education

If you are someone who has little knowledge about finances, the counseling sessions are bound to help you. Your Councillor will teach you about alternatives to bankruptcy, negotiation with your creditors, debt management plans, and debt consolidation.

  • They might even give you options to resolve your difficulties without ever filing for bankruptcy. That way, you will not risk losing your assets in the liquidation process.
  • The sessions are educational in nature. They give you the basic financial knowledge necessary to get back on your feet post-bankruptcy. 
  • After attending the sessions, you will have a basic knowledge of personal finances, money management, and budgeting.
  • These counseling sessions are very important because they prevent abuse of bankruptcy relief. 
  • As we have discussed before, corporations tend to take advantage of bankruptcy claims. 

They do so to get out of paying damages to aggrieved parties. In these cases, if a counselor finds a person to be financially stable to pay damages, they will disqualify them from claiming bankruptcy.

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Debkanya Bhattacharya
Debkanya is a lawyer turned writer. With an experience of 3 years, she is your go-to source for all things law. She has a soft corner for the US and international section. When the weekend arrives, you'll find her reading up on politics, Austen, or travel blogs over a cup of coffee.

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