Once a debtor files for bankruptcy, an automatic stay goes into effect immediately, which stops creditors from attempting to collect their debts.
Before you can file for bankruptcy, you must go through credit counseling with a nonprofit agency. Once you've completed your mandatory credit counseling, the agency will give you a certificate, which you must file with your other bankruptcy forms. Credit counseling is mandatory: If you don't file a certificate of completion, the bankruptcy court will dismiss your case.
Credit counseling became a legal requirement in 2005, when Congress overhauled bankruptcy law. (See 2005 Changes to the Bankruptcy Law for more information.) Counseling was mandated because Congress believed too many people who were financially capable of repaying their debts were instead resorting to bankruptcy to have those debts discharged. The purpose of credit counseling is to provide an outside opinion on whether a debtor really needs to file for bankruptcy or could instead get out of debt through an informal repayment plan.
What Happens During Credit Counseling
Pre-bankruptcy credit counseling sounds more intimidating than it is. You will need to bring information about your debts and your income. The counselor will review everything with you and try to determine whether you could resolve your debt problems with an informal debt repayment plan or some other alternative to filing for bankruptcy. The whole process usually takes no more than a couple of hours. Counseling can be done in person, by phone, or online.
If the agency proposes a repayment plan, you have to file it with your other bankruptcy paperwork. However, you aren't required to go along with the plan. The law requires only that you participate in counseling, not that you agree to whatever the agency proposes.
When You Must Get Credit Counseling
You must complete your credit counseling during the six months before you file for bankruptcy. At least one court has found that a debtor must get counseling at least a day before filing for bankruptcy, not earlier the same day. To be safe, don't get same-day counseling.
There are a few, rare instances when credit counseling is not required. To learn more, see Exceptions to Bankruptcy's Credit Counseling Requirement.
How to Find a Credit Counseling Agency
You must use an agency approved by the U.S. Trustee's office. Although there are plenty of businesses out there that claim to offer credit counseling, not all are legitimate. To find an approved counselor, go to the U.S. Trustee Office's website and select "Credit Counseling & Debtor Education." Although the agencies are listed by state, you can use any agency in any state or region. You aren't limited to your own state.
Most credit counseling agencies charge about $25 to $50 for the counseling, any repayment plan they propose, and the certificate of completion. Agencies are supposed to provide their services free or at low cost if you can't afford the regular fee. If an agency's charge is more than you can afford, inform the agency of this legal requirement and ask for an adjustment.
If you have concerns about any agency's fees or any other aspect of its service, file a complaint with the U.S. Trustee Program.