An estimated 80 percent of US citizens are struggling with overwhelming debt. There are many types of debt, but credit card bills and medical expenses top the list. For many people, filing for bankruptcy is possibly the best way to handle the situation.
Credit Counseling and Bankruptcy
Filing for Chapter 7 or Chapter 13 bankruptcy gives you a fresh financial start. But first, you’ll have to participate in bankruptcy credit counseling.
Bankruptcy counseling helps the courts determine the best course of action. The courts might decide that bankruptcy is your best option. Or they might decide your income is sufficient for participating in a court-ordered repayment plan.
Counseling is mandatory for anyone wanting to file Chapter 7 or Chapter 13 bankruptcy. Even if it’s clear your income is too low for a repayment plan, you must still participate in bankruptcy counseling.
Bankruptcy Credit Counseling
The US Trustee Program maintains a list of government-approved bankruptcy counseling providers.
Providers are searchable by state, judicial district, US territory, or commonwealth. But North Carolina and Alabama are not included on the US Trustee Program's list.
The US Trustee Program isn’t active in North Carolina or Alabama. Residents of these states must get counseling from providers approved by local Bankruptcy Administrators.
The United States Courts website maintains a list of approved counseling providers for filers in North Carolina and Alabama.
Proof of Participation
You’ll receive a certificate of completion for participating in counseling. The certificate is proof that you fulfilled the requirement.
The certificate of completion expires after 180 days. That means you must file bankruptcy within 180 days of receiving the certificate. If you wait longer than 180 days to file, you’ll have to retake the counseling.
Bankruptcy credit counseling is required before you can file bankruptcy. But additional counseling is required after you file, but before your case is discharged.
You’re required by US law to participate in pre-discharge debtor education. In most cases, bankruptcy credit counseling providers also offer pre-discharge debtor education.
Although this article is about bankruptcy credit counseling, you should also know about the second requirement.
The Purpose of Counseling
The US government wants people to file bankruptcy only when it’s absolutely necessary. The purpose of counseling is to make sure you have no other options.
During counseling, it might become clear that:
The outcome of your counseling determines the direction of your case.
What to Expect During Bankruptcy Credit Counseling
You’ll have a counselor assigned to your case. This counselor will help you create a budget based on your current income.
Based on your budget, the counselor will decide if there are logical alternatives to bankruptcy. If you do have alternatives, the counselor will create a plan for you to follow.
The counselor is also responsible for explaining the pros and cons of all your options - including bankruptcy.
You’re not obligated to accept the plan. However, you must include the plan with your papers when filing bankruptcy.
How to Choose a Counselor
If you’re filing bankruptcy without the help of a lawyer, you can choose your counseling provider. But if you have an attorney, ask the attorney to recommend a counseling service.
Reason for Filing
Before getting into counseling, it’s important to know why you’re filing for bankruptcy. You have to consider the type of debt you have.
Some debt isn’t erased by bankruptcy. And you’ll still have to pay no matter the outcome of our case. Below are some types of debt not discharged by bankruptcy:
Child Support and Alimony. Filing bankruptcy doesn’t eliminate payments for child support or alimony. You’ll still have to pay these expenses.
However, if you do file bankruptcy, the court might decrease the amount you’re required to pay.
Student Loans. In most cases, bankruptcy doesn’t discharge student loan debt. The only exception is if the court decides repaying the debt will cause hardship.
For the court to consider discharging your student debt, you have to file an adversary proceeding.
Tax Debt. Most tax debt isn’t eliminated by filing bankruptcy. However, there are some exceptions to this rule. Speak with a bankruptcy lawyer if your case involves tax debt.
Government Fines and Penalties. Bankruptcy doesn’t erase fines and penalties that you owe the federal, local, or state government.
If bankruptcy won’t clear all of your debt, you’ll have to find alternate means for relief. Credit counseling can help.
Exceptions to the Counseling Requirement
You are exempt from counseling if there isn’t a government-approved counselor in your district. But this is hardly ever the case, especially since counseling is available online and by phone.
There are additional ways to legitimately delay counseling.
You must then complete counseling within 30 days of filing for bankruptcy. It’s possible to get this deadline extended by 15 days upon request.
You can also avoid bankruptcy credit counseling if the court determines:
Chapter 7 or Chapter 13: Which Do You Need?
Chapter 7 or Chapter 13 are the most common types of bankruptcy for individuals. Deciding which chapter is best for you depends on your situation.
Chapter 7 Bankruptcy
Chapter 7 is sometimes referred to as liquidation bankruptcy. It can involve selling your property or other assets to pay your debts. Chapter 7 is often the choice for people who don’t have any assets to sell and are low income.
Chapter 13 Bankruptcy
Chapter 13 is sometimes referred to as reorganization bankruptcy. This type of bankruptcy allows you to keep all of your property and belongings.
You must complete a court-ordered debt repayment plan. The plan will usually last for three to five years. But if you fail to complete the repayment plan, you might lose your belongings and assets.
Moving Forward: Things to Remember
Bankruptcy credit counseling is a requirement if you’re filing Chapter 7 or Chapter 13 bankruptcy. And you must choose a government-approved counseling provider.
You’re free to choose your own counseling provider. But if you’re working with an attorney, you can also ask the attorney for a recommendation.
Counseling might help you find a better alternative than filing for bankruptcy. This will help if you have debt that bankruptcy won’t erase.
Once you’re done with counseling, you’ll receive a certificate of completion. And you have 180 days before the certificate expires. Make sure to file for bankruptcy within that 180 days.
Bankruptcy can indeed provide relief when you’re overwhelmed with debt. However, remember that your credit rating will take a hit. And it will remain on your credit report for 7 to 10 years after you file. You’ll also have to work to rebuild your credit.
That’s why it’s important to change your spending habits following the bankruptcy. You want to avoid ending up in more financial trouble.
Keep a close eye on your spending habits. Create a budget and start a savings account. And when you’re able, you might want to make some financial investments.
Take advantage of the fresh start you get from filing bankruptcy and use it to your advantage.