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Why is credit counseling required during bankruptcy?

Mandatory credit counseling is an important step in bankruptcy

One of the least time-consuming steps in a bankruptcy case is credit counseling for debtors that is mandated by the U.S. Bankruptcy Court. Courses must be taken before filing and during the bankruptcy process. If the courses are not completed by specific deadlines, the court may close the case. The two courses, which were instituted as part of the 2005 reform of the federal bankruptcy regulations, differ in their focus.

The pre-filing credit counseling course includes an evaluation of the individual's personal finances, a discussion of alternatives to bankruptcy and budget plans the debtor can undertake. In short, it is intended to help people decide whether filing bankruptcy is the best route for them to take, or if they should consider a negotiated repayment plan with their creditors.

The focus of the second course is financial management, which tries to teach individuals better ways to control their finances so they don't become overwhelmed by debt again. The course helps debtors determine their short- and long-term financial goals, develop a budget plan for themselves and their families and learn about handling financial matters.

The classes may be taken only through credit counseling agencies approved by the U.S. Department of Justice's Trustee Program, except in Alabama and North Carolina. Those states have bankruptcy administrators who approve counseling providers.

The pre-filing course must be completed within the six months prior to filing bankruptcy. The post-filing financial management program must be done within 45 days after the debtor attends the 341 meeting of creditors before a bankruptcy trustee. Certificates are provided to the debtor after each course is completed and must be filed with the court.

As Atlanta attorney Jonathan Ginsberg points out on BankruptcyLawNetwork.com, the cost of failing to take the courses is much greater than completing both. The cost of each counseling course ranges from about $35 to $100 and takes an estimated hour or two to finish either online, in person or by telephone. However, debtors who do not complete both courses are likely to face several hundred dollars in court and lawyer fees if they have to re-file their case to obtain a discharge of debts, according to Ginsberg.

"While reasonable people can debate the merits of requiring bankruptcy debtors to spend the time and money to take two financial counseling courses, it is clearly a waste of money to spend $500 because you did not get around to taking a $35 course that may take an hour or two of your time," Ginsberg writes on the website.

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