If you are considering filing for bankruptcy, you need to know about an important requirement: credit counseling. It may not be the first thing that comes to mind when you think about bankruptcy, but it is an important step in the process. In this post, we will take a closer look at the requirement, how to satisfy it, and other considerations to keep in mind.

Background

By law, you must complete “pre-bankruptcy credit counseling” before filing for Chapter 7 or Chapter 13 bankruptcy as an individual. The government maintains a list of approved pre-bankruptcy credit counseling providers (filers in Alabama and North Carolina can find approved providers here). Most NFCC-certified agencies provide this service, and the NFCC can match you with an approved bankruptcy counselor when you fill out this form.

Upon completion of the counseling, you will be issued a certificate, demonstrating that you met the requirement. The certificate is valid for 180 days, meaning that you will have up to 180 days to file for bankruptcy. Wait longer than that and you will have to retake the pre-filing counseling.

In addition to pre-bankruptcy credit counseling, there is a second “counseling” requirement. After you file for bankruptcy, but before your debt(s) is discharged, you are required by law to complete pre-discharge debtor education. Most agencies that offer the credit counseling service offer debtor education, too. This article focuses on the pre-filing credit counseling, but you should keep in mind that there are two counseling/education requirements.

What is Involved?

The purpose of the pre-filing credit counseling requirement is to ensure that consumers only file for bankruptcy if necessary. Other options may be available. Making significant changes to your household budget or enrolling in a debt management plan to pay off credit card debt, are two potential options that could allow you to bypass bankruptcy altogether. While bankruptcy may be the best option in some cases, it has drawbacks. These drawbacks include damage to your credit score, a bankruptcy notation on your credit report for 10 years, and attorney’s fees and court costs. This whitepaper discusses some of the pros and cons of bankruptcy compared to other debt relief methods.

So, what happens in an actual counseling session? The counselor will work with you to prepare an estimated budget based on your income. The counselor will assess whether a repayment plan other than bankruptcy seems feasible, and if it does then the counselor will provide a plan. There is no requirement that the you accept the plan, but this exercise can be very helpful. If the session reveals an alternative to bankruptcy, you may decide to pursue that option instead. Counselors should explain the alternatives to bankruptcy fully, and explain the pros and cons of each option. Counselors may also be able to connect you to local resources that could help further.

Choosing a Counselor

You may decide to choose your own bankruptcy credit counseling agency (we included links at the top of this post for doing just that). However, many people seek the advice of a bankruptcy attorney and then use the counseling service recommended by that attorney. There is nothing wrong with this approach, but there are a few things to keep in mind.

Perhaps the most important thing to consider is this: how committed are you to filing for bankruptcy instead of pursuing a different option? You may be interested in bankruptcy simply because you are facing significant debt. Most people have heard of bankruptcy and know that it can discharge some obligations. But you may not be familiar with other repayment options. On the other hand, you may already be certain that bankruptcy is the right choice for you.

If you go to a bankruptcy attorney after being 100 percent sure that you want to file for bankruptcy, then the pre-filing counseling may be just a formality. On the other hand, if you are focused on solving a debt problem in a general sense, you will care much more about the quality of your pre-filing counseling session because you will want to learn about additional options that may be available. Therefore, if there is any doubt in your mind about bankruptcy, you should take some time to pick the counseling agency that is right for you and will provide a personalized approach to the counseling session. We recommend NFCC member agencies for this purpose.

Key Points to Remember

Pre-filing credit counseling is a requirement for individuals who file for Chapter 7 or Chapter 13 bankruptcy. You may pick your own agency or use a referral from your bankruptcy attorney. We recommend working with an NFCC-member agency, and encourage you to consider alternatives to bankruptcy when feasible. Your counselor should review these alternatives with you. Lastly, remember that a counseling certificate is valid for 180 days, so you will need to file within that time-frame after the counseling session. Have more questions? See our Bankruptcy FAQ.

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Question: At what point does it make sense to declare bankruptcy?

Dear Reader,

The general consensus is to declare bankruptcy as a last resort, only after you’ve exhausted all other debt relief options. Yet, sometimes it is hard to know when you’ve run out of options.

Your options boil down to your overall financial situation, including your income, debts, and assets. To get a better idea where you stand, start by assessing your situation with a determination of your net worth and how much you owe. To calculate your net worth, add up all of your liquid assets, any retirement funds, real estate, and any investments that you may have. Next, tally your overall debt by adding up how much you owe for each credit card and loan. After you have the totals for each category, compare them. If you owe more than what you own and your income is not enough to meet your financial obligations, bankruptcy may be a solution.

Yet, it may not be your only one. You may be able to repay much of what you owe through a debt management plan, debt consolidation, or even settling your accounts for less than the full balance. And if you have a home, you may have options to modify your mortgage and keep your property in the long run. If you are unsure of your options, reach out to a NFCC certified credit counselor for guidance.  A credit counselor can review your situation in depth and help you figure out the pros and cons of your options, including bankruptcy.

If you decide to move forward with bankruptcy, work with an attorney to guide you through the legal process. For personal bankruptcy, you could either file Chapter 7 or Chapter 13. Chapter 7 works best for people with overwhelming credit card and few assets. In this case, your assets are sold to pay off the creditors. If you have a home or other property that you want to keep, Chapter 13 may be a better option. Chapter 13 bankruptcy allows you to pay off your creditors through a payment plan in three to five years without losing your assets. But if you miss your court-arranged payments, you may lose the assets you are trying to protect.

When it comes to repaying your debts there isn’t a one-size-fits-all type of solution. Bankruptcy may seem very scary and can severely damage your credit, but in certain circumstances, it is the right choice to clear your debt and rebuild your finances. With time, the negative consequences of bankruptcy fade away, and you will be able to rebuild your credit. You don’t have to make this decision alone, talk to a professional and evaluate your options. Good luck!

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Question: My husband and I need financial guidance and are not sure who we need to go to? A financial advisor? Debt counselor? Bankruptcy lawyer? Where do we start?

Dear Courtney,

Determining what kind of financial help you need is not always as easy as it sounds. It all depends on your current situation and your financial goals. To know what professional can help you best, you need to know what they offer. Let’s look at the differences between them.

A financial advisor is a qualified professional who can help you meet your long-term financial goals and build wealth. They meet with their clients and, taking into consideration their goals and risk tolerance, they make the appropriate recommendations to help them invest and plan for the future. Most advisors don’t come in cheap. Some are commission-based and others are fee-based. Commission-based advisors recommend products and services that typically result in higher commissions for them. Fee-only advisors work under a fiduciary standard, which means they are required by law to keep your interests above theirs. Their fees vary, depending on the state where you live and on their experience.

Unlike financial advisors, debt counselors (also called credit counselors) offer personalized financial guidance on how to manage your money and debts. They also review your current financial situation and provide an overall budget analysis to help you find the right strategies to pay off your debt, improve your credit, and learn how to manage your finances in the future. Not all debt counselors are created equal. Make sure you work with someone trustworthy and preferably from a nonprofit agency. For-profit counselors work for private entities and may charge steep fees to help you deal with your debt. Nonprofit debt counselors don’t charge upfront fees, and if you qualify, you can have counseling fees eliminated or reduced. Nonprofit counselors review your situation holistically and their main goal is not only to help you deal with your debt but to prepare you for a successful financial future.

Lastly, bankruptcy lawyers counsel their clients in the complexities of bankruptcy laws. They can advise you in reducing your debts by liquidating your assets and recommending the right type of bankruptcy for your specific situation. Bankruptcy is a rather expensive process, which can be another obstacle if you are already strapped for cash. As part of the bankruptcy process, the court requires that you go to credit counseling sessions to review your finances and set a plan for the future. So, it’s always a good idea to talk to a credit counselor first, even if you are considering bankruptcy. You may have more options than you think.

I hope that you have a better idea of the kind of advice you need and where to find it. But if you still need further guidance, I recommend you talk to a nonprofit credit counselor. If they cannot help you, they will point you in the right direction to get the assistance you need. Good luck!

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

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