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Bankruptcy Credit Counseling6 min read

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There comes a point in most people’s lives when they have to consider the effects of declaring bankruptcy on their financial lives. A massive 80% of United States citizens are currently struggling with overwhelming debt.

This is the debt that comes from credit cards, student loans, medical bills, and many other things. For lots and lots of people, filing for bankruptcy may be the only way out. If you’re finding yourself in this position, then the best thing you can do is learn everything you can about it. Here’s everything you need to know about bankruptcy.

Credit Counseling And Bankruptcy Facts

If you want to get a fresh financial start then filing for chapter 7 or chapter 13 bankruptcy will be your best shot. The only catch is that you’ll have to go to credit counseling first.

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. This 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.

Gov’t Approved Counseling

You can find government-approved bankruptcy counseling providers with the US Trustees Program. They maintain a list and the 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. 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.

Once you finish the counseling, you’ll be awarded a certificate of completion. This is to prove that you’ve fully finished your counseling and will expire 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.

Additional Counseling

That’s not all there is to it, though. 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. It’s important to know that it’s much more than simply walking into a courtroom and walking out debt-free.

Why So Much Counseling Is Required

Since there’s so much counseling involved, it makes sense that you should understand the reasons why. It’s because 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:

  • You can make changes to your budget to pay off your debt.
  • You can participate in a court-ordered repayment plan.
  • You can participate in debt arbitration with your creditors.

The outcome of all this counseling will determine the outcome of your case.

What To Expect From Your Counselor

Once you begin the process, 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.

It’s important to understand that you’re not obligated to accept the plan. However, you must include the plan with your papers when filing bankruptcy. You can also choose your own counselor. If you’re filing with the help of a lawyer then they can recommend a counselor for you.

Reasons For Filing

There are many reasons to file for bankruptcy. What you really need to understand is that not all of your debt will be erased by it. These types of debts are:

  • 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.

Credit counseling will help you with debts that you can’t get rid of through bankruptcy filing.

Exceptions To Credit Counseling Requirements

While everyone is exempt from credit counseling if they don’t have a counselor in their district, this is almost never the case. This is especially true when counseling is available over the phone or online. There are, however, some additional ways to delay counseling:

  • Prove to the court you had to immediately file bankruptcy. And that there wasn’t time to participate in counseling. For example, you may have filed to stop foreclosure or wage garnishment.
  • Prove that you tried to obtain counseling, but were unable to get it. You must prove that you didn’t receive counseling for the reasons mentioned above.

Once you prove that you couldn’t wait for counseling, you’ll have to get it within 30 days of filing. It’s only possible to extend this deadline by 15 days upon request. It will also work out if you can prove to the court that:

  • You couldn’t attend counseling because of a physical disability. However, this only applies if over the phone or online counseling wasn’t an option.
  • You are mentally incapacitated and unable to benefit from or understand counseling.
  • You were on active military duty in a combat zone.

Which Chapter Do You Need?

Chapter 7 and chapter 13 are the most common forms of bankruptcy filings. The best one for you will depend on your debt and your situation.

Chapter 7 is also known 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 is known as a reorganization bankruptcy. This type will allow you to keep all of your possessions. You’ll have to complete a court order repayment plan and your debts. This will last between three and five years. If you fail to repay your debts, you may end up losing your property. It will be auctioned off in order to pay off as much of them as possible.

Whichever chapter is right for you is up to you and your lawyer. Just remember that there’s always a way to work out your debts, no matter how far underwater you may be. Give the law a chance and you might just end up in a much better position at the end of it all, and totally debt-free.

About 

Edwin Cannon has spent his entire career in the financial industry and specializes in alternative investments and surviving marketing turbulence. He started My Retirement Paycheck to help educate consumers about retirement investment options that aren't typically introduced by advisors.