A successful Chapter 7 or Chapter 13 bankruptcy can have many benefits for individuals or married couples who are in financial trouble. While the goal of a bankruptcy is the discharge of all your qualified debts, you must meet certain requirements before you can obtain this discharge. One requirement enacted in 2005 is attendance at credit counseling courses: one prior to filing for bankruptcy and one just prior to your debt discharge. Many refer to pre-bankruptcy credit counseling as the “Initial Session” and clients regularly inquire about the purpose or benefits of this counseling requirement.
Law Requiring Pre-Bankruptcy Credit Counseling
Federal law governs most aspects of bankruptcy cases. In 2005, Congress passed the “New Bankruptcy Law,” which is formally titled the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). With sweeping changes to bankruptcy law and procedure, Congress supposedly aimed to curb abuse of the bankruptcy system by consumers by making the process more complicated and adding in obstacles to eligibility for certain consumer bankruptcies. The law added the means test requirement for Chapter 7, strict residency requirements, and new credit counseling requirements.
Under the amended federal law, consumers must complete the required Initial Session of credit counseling within the 180 days before filing a bankruptcy petition. Consumers must receive counseling from an agency approved in accordance with federal bankruptcy law. The Department of Justice provides a list of approved agencies for each jurisdiction across the United States. Consumers must then include proof of completion of the Initial Session with their bankruptcy petition.
- The law does provide some exceptions to the credit counseling requirement, which include:
- The filer is on active military duty in a combat zone
- A mental condition prevents the filer from understanding credit counseling concepts
- Despite properly requesting counseling, a filer did not receive counseling in five days
- Exigent circumstances required an immediate bankruptcy filing with no chance to complete the Initial Session
Physical disability or long distances that would make travel difficult used to be exceptions, though counseling sessions are now available over the internet and phone, so consumers rarely successfully use this exception today. If you claim “exigent circumstances” as an exception, the court will examine whether your circumstances qualify as a proper excuse and will likely require you to complete the Initial Session within a certain time period after your bankruptcy filing. This seems to make little sense, as the consumer has already commenced a bankruptcy case, so the credit counseling will do little to change their minds.
If you fail to meet the pre-bankruptcy credit counseling requirement, the bankruptcy court will likely dismiss your case. Some federal bankruptcy circuits will simply strike a petition as if a case never commenced; however, courts for the Eastern District of New York have ruled that a dismissal is the appropriate remedy in this situation. A dismissal will terminate the automatic stay, may result in multiple bankruptcy filings on your record, and can result in repeated filing fees.
Does the Pre-Bankruptcy Credit Counseling Requirement Make Sense?
Since BAPCPA changed bankruptcy laws in 2005, much debate occurs regarding whether the new requirements and obstacles to consumer bankruptcy make sense. Is the Initial Session credit counseling requirement practical and beneficial? Does it create unnecessary administrative hurdles for those seeking financial relief? First, we’ll discuss some possible benefits consumers may reap from pre-bankruptcy credit counseling.
Potential Benefits
Congress intended for pre-bankruptcy credit counseling to educate consumers considering bankruptcy regarding other debt relief options and the general bankruptcy process. In some cases, consumers may rush to file for bankruptcy when there truly are other solutions that may be more appropriate in their situation. A consumer may possibly receive credit counseling and decide to speak with a skilled attorney who can help explore whether bankruptcy is truly the right decision based on their finances.
Additionally, some consumers seeking bankruptcy may not fully understand the legal process and all the possible implications of a bankruptcy. While bankruptcy helps many people each year, it is important to know what you are getting into before you start the process. In some cases, credit counseling can help to solidify the decision to file if the consumer was previously doubting the decision.
Reasons Why the Initial Session Is Often Ineffective
Despite the supposed intention of Congress to benefit consumers by requiring credit counseling, in many ways, the requirement seems more like an unnecessary and ineffective obstacle than a true benefit. The following are some reasons often cited against the Initial Session requirement:
- Counseling only lasts 90 minutes and is generally not personalized enough to effectively educate the consumer regarding other debt relief options.
- Some consumers know and practice responsible financial handling and need to file bankruptcy based on medical bills or other circumstances they could not avoid.
- Often, by this stage in the process, a consumer’s financial situation may be so overwhelming that no realistic alternatives to bankruptcy exist.
- Even if an agency presents realistic debt relief alternatives to bankruptcy, a consumer has no obligation to take alternative action to bankruptcy.
- When it is time to undergo credit counseling, consumers are often set on their decision to file bankruptcy that they simply go through the motions to meet all requirements to commence their case.
In addition, meeting with a highly experienced debt relief and bankruptcy attorney can often provide similar—if not more beneficial—information to consumers as a credit counseling agency can. When you meet with the right lawyer, they should thoroughly review your financial situation and advise you on the pros and cons of all of your debt relief options, including bankruptcy, as well as inform you regarding the bankruptcy process and any lasting effects.
Consult with a Highly Experienced Long Island Bankruptcy Attorney
Whether you believe that pre-bankruptcy credit counseling is beneficial or an unnecessary burden, the reality is that the law requires completion of this session in order to successfully pursue a consumer bankruptcy. If you would like to learn whether bankruptcy might help relieve financial stress in your situation, consult with the skilled and experienced bankruptcy attorneys at the Law Office of Ronald D. Weiss. Call (631) 271-3737 or contact us online for more information about how we may help you.