29 Jan What Is The “Credit Counseling” That Is Required Under The Bankruptcy Laws?
Under the revisions to the bankruptcy law in 2005, Congress required a new step before you can file for any kind of bankruptcy. The new law requires ‘credit counseling’.
So what is ‘credit counseling’? Previously, credit counseling was a process of analyzing your budget and obligations with an eye to establishing a debt management plan to pay off your bills. The counselor would determine what you could afford to pay if you brown-bagged your lunch, gave away your pets, and reduced your tax withholding from your paycheck; all with an eye to generating cash to pay your creditors. Then, with this revised lifestyle in hand, the counselor would negotiate with your creditors to reduce your interest rates and payment amounts in exchange for a promise of regular payment to reduce the debt. Typically, these plans lasted for about three years. The advantage? No bankruptcy and no negative mark on your credit history.
The reality of the bankruptcy law has turned out to be quite different. Overnight, debt counselors were everywhere. Most were not legitimate and many disappeared with your money. To the government’s credit, some were forced out of business and others had to file for bankruptcy themselves. However, as with a lot of ideas in Congress, the concept was ok, but the execution was bad.
Now to file for bankruptcy, you MUST obtain a certificate from an approved credit counselor first. This certificate is your admission ticket into bankruptcy. The good counselors will review your budget and confirm what you already know: you don’t have enough money to pay your bills. Some will try to get you to commit to a payment plan. The cost is roughly the same no matter where you go – about $50.00. The counseling can be done over the internet, on the phone, or in person.
It is important to know that the process is non-threatening and you do not need to commit to any payments if you do not feel you can do so.