Credit counseling course outlines options beyond filing bankruptcy for debtors
Within the six-month period prior to filing a petition with the U.S. Bankruptcy Court, people are required to complete a credit counseling course that analyzes the factors that contributed to their financial difficulties.
As part of the 2005 reform of the federal bankruptcy regulations, the counseling class - and a post-filing financial management program - aren't meant to dissuade people in dire financial straits to forego bankruptcy. Instead, they were created to help people decide whether filing is the best route for them to take, or if they should consider a negotiated repayment plan with their creditors.
That's why the counseling session emphasizes not only their financial circumstances, but discusses the alternatives in great detail.
"The purpose of this course is to provide you with an analysis of your current financial situation, suggest ways to change spending habits and plan for a healthier financial future. The course also presents immediate options to help improve your current situation," according to Abacus Credit Counseling, one of the agencies approved by the U.S. Department of Justice's Trustee Program to administer the counseling.
The cost of pre-filing counseling ranges from about $35 to $50 and typically takes less than two hours to finish online, in person or by telephone. It is divided into three areas of discussion.
The first section features questions related to individuals' monthly income and expenses that will teach them about their current financial habits. All expenses, from housing costs to pet care, are scrutinized. Based on that information, an ideal budget is projected to show how they may improve their spending.
A second section focuses on options for dealing with their debts, citing the most important expenses first - housing and healthcare. Various scenarios, such as selling or refinancing their homes, are discussed.
Other expenses, such as car payments, student loans, back taxes and credit card payments are also addressed. Prioritizing debts in terms of the consequences if they are not paid is emphasized.
For instance, Abacus advises, "If you owe federal or state income taxes from past years, you should make these debts a high priority. Back taxes are difficult to get rid of, and federal and state tax agencies have the power to garnish your wages or even make deductions from your Social Security payments."
Finally, the ways in which people in debt can rebuild their damaged credit rating and move past their financial difficulties are outlined. A section that provides information about paying back creditors over several years or working with a credit counseling agency rather than filing bankruptcy explains the advantages and disadvantages of each option, as well as resources for more information.
When discussing bankruptcy, the course lists the merits of filing a Chapter 7 case, which is a liquidation process, as well as Chapter 13, which allows debtors to keep their property while paying creditors over several years. If people decide to file bankruptcy, they will be required to provide the court with a certificate showing that a credit counseling course was completed.
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