GAO Publishes Study On Pre-Bankruptcy Credit Counseling

09 Jun GAO Publishes Study On Pre-Bankruptcy Credit Counseling

The U.S. General Accountability Office recently issued a report of the effectiveness of the pre-bankruptcy credit counseling required by the changes to the Bankruptcy Code in 2005. You can read the report here.

SURPRISE! The GAO found that the effectiveness of this required credit counseling is NOT CLEAR!

The GAO found that “evidence suggests that by the time most consumers receive the counseling, their financial problems are dire and they have few viable alternatives to bankruptcy”. In plain-speak, it means that you have to do “credit counseling”, but it comes so late in the process that there is no possible way to prevent the inevitable bankruptcy filing. (Ever try to stop a train wreck? It’s like that.) In fact, the pre-bankruptcy credit counseling may actually harm some consumers by delaying the filing of a bankruptcy so long that it is too late. Human nature is such that one will try anything possible to avoid filing for bankruptcy. If you wait too late, the pre-bankruptcy credit counseling could delay the process. For example, in Connecticut most foreclosures are conducted on Saturdays. If you waited until a Friday afternoon to file for bankruptcy, there may not be enough time to conduct the pre-bankruptcy credit counseling before the foreclosure is completed.

Ostensibly, Congress indicated that the purpose of the credit counseling provisions was to ensure that consumers could “make an informed choice about bankruptcy, its alternatives, and consequences.” The report noted that the counseling was intended to give consumers in financial distress “an opportunity to learn about the consequences of bankruptcy – such as the potentially devastating effect it can have on their credit rating” before they decided to file for bankruptcy relief. It sounds good, doesn’t it? But in reality, this “informed disclosure of alternatives to bankruptcy” is meaningless. No one likes to hear what they could have, or should have, done to avoid their current predicament. You want to know how to fix it NOW!

The GAO office is renowned for its understatement. What this report is saying is that the pre-bankruptcy credit counseling is an added layer and another hurdle placed in the path of American families in need of real relief. While the report does not yet recommend that the requirement be eliminated, it does question whether the process really benefits the consumer.

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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