Bankruptcy Court & Credit Counseling

Bankruptcy discharges a person's debts or forces creditors to accept a court-approved repayment plan, depending on the type of filing, according to the Federal Trade Commission (FTC). A 2005 law called the Bankruptcy Abuse Prevention and Consumer Protection Act imposed a counseling requirement on consumers. They must get special credit counseling before they can file a bankruptcy case.

Description

Pre-bankruptcy credit counseling is done through a government-approved organization, the FTC explains. The session includes a budgeting discussion, information on bankruptcy alternatives and an overall evaluation of the consumer's financial situation. It may be held in a credit counselor's office, online or over the telephone.

Time Frame

A typical pre-bankruptcy credit counseling session runs between 60 and 90 minutes. Counseling must be completed 180 days before a person files for bankruptcy. Consumers can proceed with a case after that time frame or proceed with another option discussed in the session, like a tight budget plan.

Cost

The FTC states that most approved credit counseling sessions cost about $50. The provider must disclose the fee up front, and it must be waived for people who cannot afford to pay.

Providers

Bankruptcy courts require prospective filers to use approved credit counseling firms. The U. S. Trustee Program maintains a searchable database for all 50 states and the District of Columbia (see Resources), including firms that hold sessions in languages other than English. Some of the providers only provide telephone and online sessions.

Considerations

The law that requires pre-bankruptcy credit counseling also forces people to go through debt education once their cases are discharged. Classes usually run about two hours, according to the FTC, and they cover topics such as money management and responsible credit use. The information is meant to help consumers avoid repeating the problems that led them to bankruptcy. Debt education fees run between $50 and $100, although the FTC advises that payment is waived for people who cannot afford it.

Alternatives

Bankruptcy is reported by the credit bureaus for ten years. Consumers with this information on their reports often have a hard time opening new accounts, especially in the first years after their filing. Some opt for plans that have a shorter impact, like self-budgeting, negotiating with creditors or entering into formal debt management plans through credit counseling firms. Late payments hurt a person's credit reports, but they are erased sooner than a bankruptcy. The bureaus only list them for seven years.