Before a person can file bankruptcy, she must take a consumer credit counseling class offered by an approved provider. Then, once having filed, before she can get her discharge, she must 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?
Why the class?
The requirement for both classes was added to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA, or bappa crappa, as it’s sometimes lovingly called). 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 and help people achieve financial independence.
The pre-filing course.
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. This first course also discusses alternatives to bankruptcy, the goal here being to encourage some debtors to reach partial settlements with creditors.
Once completed the debtor receives a certificate that must be filed with her bankruptcy petition. The certificate is valid for six months from the date of completion. If the debtor doesn’t file bankruptcy within that six-month time, she is required 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.
Online or by phone.
Both the pre and post filing courses are offered online or by phone. The cost is fairly nominal, about $40 for both, though to a cash-strapped debtor, the cost sometimes acts as a deterrent to a prompt filing. The time involved depends on how quickly a person moves through the modules in the courses. If a person is moving too quickly, in the program’s opinion, a warning sign flashes on the screen, advising the person to slow down and concentrate on what they are doing. Unfortunately, most people just want to file and get things over with, so rushing is a common occurrence.
Effectiveness of the courses.
Since BAPCPA started requiring the courses in 2005, there have been a few quantitative studies on the effectiveness of the courses in changing debtor’s behaviors. In one study, only 6.9% of those post-bankruptcy debtors interviewed said that the courses were helpful. This study said the most common description for the courses was “a waste of time.”
Some post-bankruptcy debtors reported changing their financial behavior, but not because of the courses. Instead, it was the result of the bankruptcy itself. In other words, the experience of filing bankruptcy was sufficient to change their financial ways.
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.