Before a person can file bankruptcy, she has to take a consumer credit counseling class offered by an approved provider. Then, once having filed, before she can get her discharge she has to take a second class, a financial management class, also offered by an approved provider. What’s this all about? Is it just another way for the government or the lawyer to squeeze a few more bucks out of a poor debtor?
The requirement for both classes was added to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. The theory was that bankruptcy often treats the symptom (being too far in debt) without treating the cause (how did the debtor get there). Congress felt that educating debtors on the rudiments of financial management might prevent them from falling into the same poor habits that got them into bankruptcy once they get their discharge and a fresh start. In other words, Congress was trying to prevent repeat filers. Additionally, the course is intended to help the debtor determine whether she can get out of debt without having to file bankruptcy at all.
The first class, the consumer credit counseling class, walks the debtor through a series of exercises where she enters her monthly income and expenses, itemizing expenses into categories such as rent or mortgage, food, credit card payments, medical bills, car payments, utilities, etc. This is helpful for debtors to show them where their money goes. Then the class shows debtors approximately how much of their monthly income they should be paying in each category in order to remain on solid financial footing. This is helpful to show the debtor where improvement can be made. Once completed the debtor receives a certificate that has to be filed with her bankruptcy petition. The certificate is valid for six months from the date of completion. If the debtor doesn’t file within that six month time, she has to take the class again.
The second class, financial management, repeats some of the steps of the first class, but helps the debtor plan a budget going forward. As with the first class, the debtor receives a certificate upon finishing, which also has to be filed with the court before a discharge can be granted. If the certificate isn’t filed, the case can be closed without the debtor’s receiving a discharge, which defeats the purpose of the bankruptcy. If that happens, the debtor can move to reopen the case for the purpose of filing the certificate and receiving a discharge, but that adds costs and attorney’s fees. The better approach is to take the class and file the certificate.
Neither the court nor the attorney receive any part of the cost of these classes. They are offered by private providers who have become qualified to offer the classes through the Administrative Office of the Courts. More information from the UST’s office can be found on their website, where a person can also find a list of approved credit counseling providers for their state.