How To File Bankruptcy: Credit Counseling

This is part of our series on How To File Bankruptcy.

Pop quiz time.  What’s the biggest waste of time and money in the bankruptcy law?

It makes no sense on any level. In order to file for bankruptcy you need to go through a mandatory credit counseling certification process.

Note that I didn’t say you need to go through credit counseling, that “take all your credit card debts and combine them into a single monthly payment” process you know from late-night television and newspaper ads.

Nor did I say you needed to review your financial situation with a certified financial planner to see if there’s another viable option for getting out of debt.

You’ve made the decision to file for bankruptcy, met with a lawyer, sized up your options … and you still have to do this credit counseling certification. And before we begin, let me be clear about one thing – the credit counseling certification process in bankruptcy has absolutely nothing to do with the very valid goal of financial literacy. It is a necessary evil, and nothing more.

Depending on which company my clients use, each year collectively they waste tens of thousands of dollars.  They get nothing out of it except a piece of paper that allows them to file for bankruptcy.  None complete the process any smarter or better informed.

Why Credit Counseling Is Required Before You File For Bankruptcy

Under the Section 109(h) of the U.S. Bankruptcy Code, you are required to obtain a credit counseling certification from a government-approved organization within 180 days before you file for bankruptcy. There are, however, a few limits exceptions. They are:

1. if you live in a district for which the United States trustee (or the bankruptcy administrator, if any) determines that the approved nonprofit budget and credit counseling agencies for such district are not reasonably able to provide adequate services.
2. if you submit to the court a certification that: (a) describes exigent circumstances that merit a waiver of the credit counseling requirement; (b) that you requested credit counseling services from an approved nonprofit budget and credit counseling agency, but were unable to obtain the services during the 7-day period beginning on the date on which you made that request; and (c) is satisfactory to the court.
3. if the court determines, after notice and hearing, that you are unable to complete the credit counseling certification because of incapacity, disability, or active military duty in a military combat zone.

You may have a shot at #3, but the first two exemption classifications are unheard-of.  Don’t fool yourself.

Finding An Approved Credit Counseling Company

The Department of Justice’s U.S. Trustee Program has a massive list of approved credit counseling certification providers.  Most lawyers have one or two companies they like to use, either due to lowest price, service, or a combination of both.  I’ve used many of them, and find that the only real difference is in price and languages spoken.  For example, if I’ve got a client who speaks Tagalog then I’m going to look for a company that offers services in this language.

What To Expect During The Session

The credit counseling session usually lasts between 20-30 minutes.  Some places take longer, other shorter.  This is a session that doesn’t impart any particular knowledge or wisdom, though; I went through it when the requirement came into law in 2005, and thought it was a glorious waste of time.  Therefore, I don’t think there’s anything wrong with a client doing the session while surfing the Internet or flipping through a magazine.

I know, it’s heresy.  But it’s my opinion.  So there you have it.

Filing The Certification

Once you’ve gone through the session (usually by phone or online – if you’ve got a choice, go with the “online only” option so you can take it without turning down the television), you’ll get a certificate of credit counseling completion.  To protect against fraud, the certificates are produced through a central automated system and are numbered.

I usually get it for my clients because it’s easier for me to compile the documents rather than making my client jump through more hoops.  You need to file it with your petition, and our computer system will handle that so nothing gets lost in the shuffle.

Don’t Lose Sleep Over This

The credit counseling process is nothing like you’ve gone through.  It’s the bankruptcy equivalent of a diploma mill, churning out certificates to all comers.  Nobody’s going to pass judgment on you, and nobody’s going to tell you to do something you don’t want to do.

Just go with the flow.  Someday Congress will take away this silly requirement, but until then we’re going to have to live with it.

Image credit: Yukon White Light