Individuals are required receive credit counseling from an approved agency within 180 days before the bankruptcy filing date. This requirement was enacted in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, and is meant to encourage debtors to pursue non-bankruptcy alternatives. In reality, pre-bankruptcy credit counseling has no impact on the number of bankruptcy cases filed.
In a few limited circumstances credit counseling is not required. These circumstances are identified by the federal law as:
(1) incapacity where the person is so impaired by reason of mental illness or deficiency that the individual is incapable of making rational decisions;
(2) disability where the person is so physically impaired that the individual is unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing session; or
(3) active military duty in a military combat zone (currently Arabian Peninsula Areas, Kosovo area, and Afghanistan).
The law allows individuals to receive credit counseling after the bankruptcy filing under the following conditions:
(1) exigent circumstances exist that merit a waiver;
(2) the individual requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services during the 5-day period before filing bankruptcy; and
(3) the request and explanation is satisfactory to the court.
Note that procrastination, inability to pay for the counseling, incarceration, etc. are not part of this list. The bankruptcy court is very reluctant to approve waivers except in the most extreme circumstances. A pending lawsuit or foreclosure alone is not enough.
Only agencies approved by the Department of Justice’s U.S. Trustee Program can issue pre-bankruptcy credit counseling certificated that are accepted by the bankruptcy court. Each agency is required to provide the service free of charge if you cannot afford to pay the credit counseling fee. Otherwise, the agency will charge a fee of around $50. The session will last approximately 60 to 90 minutes and includes an evaluation of your personal financial situation, a discussion of alternatives to bankruptcy, and may include a personal budget plan. This counseling session may take place in person, on the phone, or online.
Once your credit counseling session is completed, a certificate is issued which must be filed with your bankruptcy case. Failure to complete the credit counseling or file the certificate will result in the dismissal of your bankruptcy case.