Credit Counseling and Debtor Education
- A debtor must obtain credit counseling from an credit counseling agency approved by the United States Trustee before filing for either Chapter 7 or Chapter 13 bankruptcy.
- After completing credit counseling, the debtor will receive a credit counseling certificate, which is good for 180 days, and a budget plan for paying his debts.
- The certificate, budget plan, and a description of the services provided must be submitted along with the bankruptcy petition before the certificate expires.
- A debtor must also complete a personal financial management course (aka debtor education) from an agency approved by the U.S. Trustee before receiving a bankruptcy discharge. The financial management course is usually taken during bankruptcy, although it can be completed before filing.
- A statement confirming the completion of a financial management course must be submitted no later than 45 days after the 1st creditors meeting in Chapter 7 and no later than the last payment in a Chapter 13 case.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA, Bankruptcy Act)
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amended the federal bankruptcy code to require:
- individuals to receive budget and credit counseling from an approved provider before filing a bankruptcy petition
- bankruptcy petitioners to complete an instructional course on personal financial management, otherwise known as debtor education, to have their debts discharged.
The BAPCPA requires that providers meet certain criteria:
- that credit counseling sessions provide objective information
- present unbiased information
- counseling providers must be nonprofit entities with independent boards of directors
- prohibits counselors from receiving commissions or bonuses based on the outcomes of the counseling sessions
- providers must obtain approval from the Department of Justice's U.S. Trustee Program (hereinafter, the Trustee Program), which oversees the bankruptcy process for most federal judicial districts and acts to ensure compliance with bankruptcy laws and procedures.
The BAPCPA requires that credit counseling
- be presented to an individual or group, but can be conducted over the telephone or Internet as well as in person, although the Internet is now the primary means of presenting the credit counseling
- help debtors to develop a budget
- provide an analysis of the debtor's financial condition, including the causes of the debtor's problems
- provide a solution to the debtor's problems without incurring more debt
The U.S. Trustee indicated that counseling sessions should average 60 to 90 minutes and issued a rule prohibiting credit counselors from providing legal advice, unless otherwise authorized by law.
The U.S. Trustee maintains a list of approved agencies:
Each bankruptcy petitioner must certify that they have taken an approved credit counseling course by an agency approved by the U.S. Trustee by filing Exhibit D to Official Form 1, Individual Debtor's Statement of Compliance with Credit Counseling Requirement with the bankruptcy petition, and attach both the certificate received from the agency indicating that the course was completed and any debt repayment program that was developed as a result of the counseling.
Purpose and Effectiveness of Credit Counseling
Although many debtors see the credit counseling as an obstacle, and, indeed, most are too far into debt to hope to climb out of it through a repayment plan, even a renegotiated plan for lesser amounts, any debtor filing for bankruptcy must have the certificate and the repayment plan offered by the credit counselor. The certificate is good for 180 days, so the debtor must file for bankruptcy by then to use the certificate; otherwise, another certificate must be obtained.
A survey of bankruptcy judges was conducted by the Federal Judicial Center that asked what they did when the debtors did not have the credit counseling certificate:
- 44% of judges set a deadline to produce the certificate
- 34% had issued an Order to Show Cause or otherwise set a hearing on the deficiency
- 20% had taken no action
- 13% had dismissed the case.
The survey also showed the proportion of judges that treated foreclosure or eviction as an exigent circumstance that would allow the debtor to file for bankruptcy without the credit counseling certificate:
- 35% of the judges said they treated imminent foreclosure or eviction, by itself, as an exigent circumstance
- 55% considered it an exigent circumstance only if the debtors could satisfactorily explain why they had not yet received credit counseling
- 10% said that imminent foreclosure or eviction was never considered an exigent circumstance.
Cost of Credit Counseling
Credit counselors typically charge about $50 per session, but the BAPCPA requires that the fee be waived if the client is unable to pay. The cost must include the counseling certificate and must be presented to the debtor before the session begins.
The BAPCPA requires that providers charge reasonable fees and offer their services without regard to an individual's ability to pay, but does not define â€œreasonableâ€ or â€œability to pay.â€ According to a recent GAO report, providers' policies for waiving fees varied and Trustee Program data on the 3 largest providers showed significant variations in the proportion of clients whose fees were waived — 4%, 15%, 26%.
How Credit Counseling Works
Because the debtor must use a provider approved by the United States Trustee for a given judicial district, the debtor would have to determine which bankruptcy district he is in, and then find a provider approved for that district — the debtor can find all this information on the U.S. Trustee's website, including which providers have courses in languages other than English.
The debtor must then contact the provider, and make arrangements for the counseling session, which will be 60 to 90 minutes long. It can be done in a classroom, over the telephone, or over the Internet, but the available options depend on the specific provider. So if you want to use the Internet, be certain to choose a provider offering that option. Most people choose the Internet or the telephone, because it is more convenient and faster. Many providers can commence the session within 24 hours using the telephone or the Internet. In fact, using the Internet, the session can begin almost immediately. Many times, the debtor first learns of the credit counseling requirement consulting with a lawyer, and many lawyers, if they are hired, place the debtor in a room immediately to use the phone or the Internet to get the counseling session done.
When the session is done, the counselor will prescribe a repayment plan. However, most debtors are too far into debt to make any repayment plan feasible. Indeed, most debtors learn of the credit counseling requirement after they have already decided to file for bankruptcy. In any case, it is not necessary to follow the plan to file for bankruptcy, but the debtor does need the certificate and the repayment plan to file.
When a provider completes a prefiling credit counseling session, it uses a Web-based system operated by the Trustee Program to issue the client a certificate, which includes a unique certificate number. A bankruptcy petitioner must provide to the court the certificate to prove that the counseling requirement has been satisfied.
Only a very small number of clients receiving prefiling credit counseling have entered into any debt management plan. Counseling providers and representatives of bankruptcy attorneys that were interviewed generally estimated that fewer than 2% of prefiling credit counseling clients entered into debt management plans. Furthermore, a survey by the National Foundation for Credit Counseling of its member agencies indicated that about 3% of clients who signed up for prefiling counseling from October 2005 through August 2006 enrolled in a debt management plan. In general, representatives of consumer groups, panel trustees, and others that were interviewed said that they had not observed cases in which clients receiving prefiling credit counseling had been inappropriately encouraged to enter debt management plans or avoid filing for bankruptcy. As of October 2006, the Trustee Program had received 5 formal complaints (out of more than 650,000 credit counseling certificates issued) alleging that providers made harmful or inappropriate recommendations. A review of the documentation associated with these 5 complaints indicated that in each case the provider gave the Trustee Program a comprehensive response. In each of these 5 cases, the program was satisfied that either the complaint lacked merit or the provider had taken appropriate steps to remediate the problem.
Debtor Education (Personal Financial Management Course)
Another requirement for debtors to get a bankruptcy discharge is to take a personal financial management course, usually known as debtor education. The provider of the course must be approved by the U.S. Trustee. However, this requirement can be satisfied during the bankruptcy; it does not have to be taken before bankruptcy, although it can be.
Debtor Education Sessions Are Designed to Offer Financial Management Skills
The BAPCPA describes the debtor education requirement as an â€œinstructional course concerning personal financial managementâ€ that could be offered in person, by telephone, or via the Internet. The Trustee Program's interim final rule specified that the course should average 2 hours in length and include written information and instruction on four major topics:
- budget development, which includes, calculating income, identifying and classifying monthly expenses, and setting short-term and long-term goals;
- money management, which includes keeping adequate financial records, developing decision-making skills to distinguish between wants and needs, comparison shopping, maintaining appropriate levels of insurance, and saving for emergencies;
- wise use of credit, which includes:
- using credit appropriately and identifying alternatives to credit;
- understanding the types, sources, and costs of credit and loans;
- identifying debt warning signs;
- and checking their credit files;
- consumer information, including where to find public and nonprofit resources for consumer assistance and learning applicable consumer protection laws and regulations.
Before the debtor can receive his discharge, he must file the Form B-23, Debtor's Certification of Completion of Instructional Course Concerning Financial Management. A Chapter 7 debtor will not receive a discharge until this form is filed, and if the Chapter 13 debtor does not submit this form before his last payment, then he will not receive a discharge and his case will be dismissed. The debtor can re-open the case to file Form B-23, but he must pay an additional filing bankruptcy fee.
Cost of Debtor Education
The BAPCPA requires that providers charge reasonable fees and provide their services without regard to a client's ability to pay. Neither the statute nor the Trustee Program's interim final rule provide specific criteria for what constitutes a â€œreasonable feeâ€ or â€œclient's ability to pay.â€ However, debtor education sessions typically cost about $50 or less — about the same amount as credit counseling.
Providers have varying policies for determining a client's ability to pay the fee. Some providers, according to a recent report, used as their threshold a percentage of the poverty line or other criteria, such as whether the client received legal aid or disability benefits. The 3 largest providers used the following criteria:
- debtor's income was at or below 150% of the poverty line
- debtor's income was at or below 120% of the poverty line
- debtor received free legal aid or had disability income
Providers said that they allowed their counselors to use their discretion to waive fees in additional circumstances as well.
According to Trustee Program data, the 3 largest providers waived their fees 6%, 21%, and 34% of the time for debtor education courses. The differences arose from differences in their fee waiver policy, in the discretion given to employees to waive the fee even when it contradicted the official policy, and, sometimes, the client simply didn't pay.
The Trustee Program requires that providers disclose their fee schedules in their applications, and as of July 2006, has also required providers to disclose their policies for reducing or waiving fees based on the client's ability to pay. The providers' waiver policies must be clear and objective. Providers must advise clients of their fee schedules before services are rendered and inform them that services are available for free or at a reduced rate based on their ability to pay. The fee schedule must include the education certificate.
In the future, the United States Trustee may require more formal criteria to determine a debtor's ability to pay. According to some suggestions, fee waiver policies may be based on local economic conditions and costs of doing business.
How Debtor Education Actually Works
According to a Trustee Program official, to cover the required topics, most of the debtor education providers used 1 of about 15 standard curricula — for example, the National Foundation for Credit Counseling's Live a Richer Life or the Federal Deposit Insurance Corporation's Money Smart.
The Trustee Program provided the following statistics on certificates issued between July 11 and October 17, 2006:
- 50% was conducted by Internet
- 29% was conducted via telephone
- 21% was conducted in person, usually as part of a group in a classroom
For Internet sessions, the client generally reads the educational material and takes an on-line quiz, and then may have a follow-up discussion with an instructor. Although the debtor does not have to have an individual counseling session, the Trustee Program does require that a counselor be made available to answer any questions clients may have.