Bankruptcy Basics: Why Does a Debtor Have To Take Credit Counseling Before Filing Bankruptcy?

01 Sep Bankruptcy Basics: Why Does a Debtor Have To Take Credit Counseling Before Filing Bankruptcy?

In 2005, Congress adopted the Bankruptcy Abuse Prevention and Consumer Protection Act. That Act had not passed (it had been proposed many times) for over 8 years, but suddenly Congress took an interest in bankruptcy. That new law imposed new restrictions on filing bankruptcy for consumers (there is actually very little consumer protection within the Act). A new definition was placed within the Act for who could be a “debtor“. That definition includes language that a debtor was a consumer who had completed a course in credit counseling and obtained a certificate as proof of that course completion. This credit counseling can only be obtained through a program which has been certified by the Department of Justice United States Trustee program.

So, what’s in the program? Basically, the consumer provides details on the debts owed, income and what expenses the consumer has. The credit counselor reviews the information and tells the consumer whether or not the household spending is above/below average. If a credit counseling program offers a debt management program to that consumer (who magically is now a debtor as soon as the certificate is obtained), the consumer/debtor must file the debt management program along with the certificate.

What education is provided within that credit counseling program? Why, the knowledge that the consumer is not “making it” through each month on their budget. Hardly a surprise for most consumers in financial trouble. But, at a cost of about $50 (although the fee is to be waived for hardship), the consumer is now a debtor and can file bankruptcy. None of my clients have been impressed or “educated” by this class. Most believe (and I must agree), that this class is 90 minutes of their lives that they will never get back.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
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