15 May Bankruptcy, Credit Counseling and Debt Management Plans (Part 1)
Bankruptcy and the credit counseling requirement – what is the difference between the credit counseling required before I file for Chapter 7 or Chapter 13 and a debt management plan (DMP)?
The revisions to the bankruptcy code passed in 2005 require that before you file a case under Chapter 7 or Chapter 13, you must conduct ‘credit counseling’. See “What Is The ‘Credit Counseling’ That Is Required Under The Bankruptcy Laws?“
The reality is that bankruptcy related credit counseling is really nothing more an independent verification of your budget. How is this related to credit counseling? It isn’t. It is, however, another hurdle to jump over prior to filing a Chapter 7 or Chapter 13 case. Every month you make another payment on the account is another month’s payment the credit industry has squeezed out of you.
The General Accounting Office has found that the value of the required credit counseling prior to filing is not clear. See, Report GAO-07-203, April 6, 2007. The pre-bankruptcy credit counseling does not help you pay your bills and does not magically add money to your budget. In fact, it doesn’t really teach you anything and serves no valid purpose.
So why do you need to do credit counseling before you file for bankruptcy? Simply put, it was a part of the 2005 law change that was included as a way of making the credit counseling companies happy. The credit counseling companies were upset over the fact that people were filing for bankruptcy in record numbers, and hoped that by inserting this requirement they’d be able to dissuade more people from going to the courthouse door and, instead, give a debt management plan a try.
In the end, it’s turned into nothing more than a multi-million dollar side business for not only established debt management companies but also for new agencies that have sprung up to serve the bankruptcy market.
In other words, Congress in 2005 took a few more bucks out of your pocket and gave you nothing in return.