06 Apr Why I Hate Pre-Bankruptcy Credit Counseling
The new bankruptcy law which most lawyers and judges refer to publicly as BAPCPA (the misnamed “Bankruptcy Abuse Prevention and Consumer Protection Act”) and privately as BARF (the “Bankruptcy Abuse Reform Fiasco”) imposes a new requirement on people who file for bankruptcy relief: Before you can even get in the door of the Bankruptcy Court, you must first complete a “Credit Counseling Course.”
This is an absolute necessity. Failure to take the course and obtain a certificate of completion before you file will result in the near-automatic dismissal of your case. Many people may say, “Well, this is a good thing. If you have financial problems, taking a course about credit should help avoid in the future the problems that resulted in the bankruptcy filing.” This statement is well-intentioned but misguided. The pre-filing counseling is not only pretty useless, but is demeaning and insulting to the overwhelming majority of people who file.
Why is it useless? Requiring pre-bankruptcy credit counseling is like closing the barn door after the horse has escaped. The time for credit counseling is before someone incurs debt, not after that debt has swollen to a level that can’t be supported.
Credit education can be effective only when it is offered in time to prevent poor borrowing decisions. And what passes for “counseling” in most of these courses can’t even be called “credit education.” It’s available primarily by phone or over the internet, not in a traditional class setting.
The fee is too low (around $50) and the time too short (between 45 and 90 minutes) to allow good teachers to conduct any sort of comprehensive evaluation of someone’s financial circumstances or teach them how to change behavior and make better decisions. There is no testing and no follow-up.
There is no relationship between the nature of the case and the counseling requirement: a Ph.D. in economics with $2,000,000 in debt must take exactly the same class as the high school dropout with $10,000 in debt. And the urgency and goal-oriented nature of the class “I must finish this before I can file!” is not exactly conducive to learning.
In short, it’s a, “Just let me finish it as quickly as possible so I can move on to the next step” class.
Why is it demeaning? Because the overwhelming majority of people who file for bankruptcy relief do so not because of poor credit management skills or overspending, but because of a personal or family tragedy.
In other words, bankruptcy happens in spite of good decisions, not because of poor decisions; bad things happening to good people.
Harvard professor Elizabeth Warren did a study in 2005 that showed that half of all bankruptcies were medically related, and of that number, 75% of the people who filed had health insurance. This is hardly poor planning or management.
My personal experience with my clients (as well as that of other bankruptcy attorneys I have spoken with around the country) indicates that the top causes of bankruptcy are illness, death of a family member, job loss or job change, and separation and divorce. These root causes are responsible for about 95% of all bankruptcy cases.
What does this have to do with credit counseling?
Requiring everyone who files for bankruptcy to take a credit counseling class before they can file, regardless of the circumstances that caused the filing, sends a message to good, honest people who have fallen on hard times that they are personally at fault for their troubles, and if only they had done things better, they wouldn’t be facing financial problems.
- Your son got cancer and you couldn’t pay his medical bills? That’s your fault – you need to take a credit counseling class so it won’t happen again.
- Your wife was killed in an auto accident, and your single income can’t support your previous bills? That’s your fault – you need to take a credit counseling class so it won’t happen again.
- You lost your job, and have been out of work for 10 months and can’t pay your bills? That’s your fault – you need to take a credit counseling class so it won’t happen again.
- Your husband left you and isn’t paying child support, and you can’t pay your bills? That’s your fault-you need to take a credit counseling class so it won’t happen again.
And to suggest that had you previously spent 45 minutes on the phone with a credit counselor you wouldn’t now be filing for bankruptcy is insulting and demeaning to people who have had these family tragedies occur.
Requiring credit counseling before you can file for bankruptcy, like so much of this mean-spirited new law, falsely assumes that the vast majority of people who file are liars, cheats and thieves who are just running up credit card bills while planning to file for bankruptcy and do it all over again. Nothing could be farther from the truth. Ask any bankruptcy judge or trustee what percentage of people who file fall into this abusive category, and they will tell you that it is well under 3%, and much smaller than that in other comparably-sized programs…and most are caught by the panel Trustees, US Trustees or the Court before they can get away with it.
What’s the solution? Eliminate the useless and insulting pre-filing credit counseling requirement. If Congress actually wants to encourage people to make good credit decisions (instead of just creating the appearance of doing so), it should require the completion of a credit management class as a condition of graduation from high school, and before you take out a mortgage or your first credit card. (I’d personally suggest watching the movie “Maxed Out” before you get any loan). And if you have been lucky enough not to have suffered from one of the circumstances responsible for most bankruptcies, you would be wise to remember the words of John Bradford: “There, but for the Grace of God, go I.”
(Note: There are good, motivated credit counselors out there, and I don’t want this article to be considered an overall criticism of credit counseling. I highly recommend Hummingbird Credit Counseling and the Institute for Financial Literacy for pre-bankruptcy counseling. But the restrictions and requirements they operate under in the bankruptcy context make it impossible for them to do what they want to do: help people make better credit decisions.)
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