Contrary to public perception, the bankruptcy process does not in fact begin with the filing of a bankruptcy petition. Before a debtor can initiate formal bankruptcy proceedings, he or she must complete an approved credit counseling briefing in order to assess his or her present financial circumstances and determine the next step. This is true for both personal bankruptcy cases and Chapter 11 cases.
The following are some frequently asked questions about credit counseling:
- What is credit counseling?
Required by the U.S. Bankruptcy Code, credit counseling is an important preliminary step in the bankruptcy process. Its purpose is to assess a debtor’s financial position and the extent of their obligations, and to determine whether any courses of action other than filing for bankruptcy are possible options for the debtor.
- Who needs to seek credit counseling?
According to the Bankruptcy Code, all individuals who intend to file a bankruptcy petition, regardless of chapter number, must obtain credit counseling. This is the case even for situations, such as a Chapter 11 bankruptcy, where the debts in question are primarily business debts rather than consumer debts.
- How does one obtain credit counseling?
Credit counseling typically consists of an individual or group briefing session offered by a nonprofit credit counseling agency that has been approved by the U.S. Trustee Program. Sessions may be conducted in person, over the phone, or online. It is important to understand that not all agencies that offer help with debt counseling are federally approved. Also, completing credit counseling with a non-approved agency may not fulfil the credit counseling requirement of the Bankruptcy Code. A list of approved agencies, searchable by state, exists on the U.S. Trustee Program website. The website also includes a searchable list of approved agencies that offer credit counseling services in languages other than English or Spanish.
- Can one complete credit counseling at any time during the bankruptcy process?
No. As specified by the Bankruptcy Code, a debtor must complete credit counseling within the 180-day period preceding the filing of a bankruptcy petition. When the debtor completes the counseling session, he or she will be issued a Certificate of Credit Counseling, which the debtor must include when filing a bankruptcy petition.
- What if someone has to file a bankruptcy petition before completing credit counseling?
In certain circumstances, known as “exigent circumstances,” it is possible to obtain a temporary waiver of the credit counseling requirement. This typically happens in cases where a debtor made a request for credit counseling services but, due to exigent circumstances, was not able to obtain counseling within the five-day period following the request. When a temporary waiver is granted, a credit counseling session must usually be completed within 30 days after filing for bankruptcy, with the possibility of a 15-day extension for cause if allowed by the court.
Occasionally, extreme circumstances may result in a more extensive waiver being granted. For example, after Hurricane Katrina, the credit counseling requirement was waived by the U.S. Trustee Program for all Louisiana districts and in the Southern district of Mississippi. In cases such as this, where a waiver applies to an entire area due to a natural disaster, the U.S. Trustee’s office reviews the waiver on an annual basis to determine if it is still necessary or applicable.
- What are the consequences of failing to complete credit counseling?
If credit counseling has not been completed and no request for a temporary waiver has been made or granted before a debtor files for bankruptcy, it is highly likely that the bankruptcy judge will simply dismiss the case. At present, no case law exists concerning the potential effect of such a dismissal on a debtor’s right to obtain a discharge in a subsequent bankruptcy case.
- Is anyone excused from completing credit counseling?
There are only three situations in which full exemption from the credit counseling requirement is typically granted: where the debtor is unable to complete a counseling session due to physical disability or impairment; where the debtor’s level of mental incapacity makes rational comprehension and decision-making impossible; and when the debtor is in active military service in a combat zone. Exemptions for all three situations must be granted by the court.
- Are credit counseling and debtor education the same?
No. As mentioned, credit counseling occurs prior to filing for any chapter of bankruptcy and focuses on the present state of a debtor’s finances. Debtor education, on the other hand, is completed after bankruptcy has been filed, and deals with issues of life after bankruptcy, including budgeting and money management, credit, and financial decision-making. Furthermore, because debtor education concerns personal financial management, it is only a requirement for individual debtors in Chapters 7 and 13 bankruptcy cases, and not for Chapter 11 or 12 debtors.