If you file for Chapter 7 or Chapter 13 bankruptcy, you must take a credit counseling class before you file and a debtor education course before you receive your bankruptcy discharge. The purpose of this requirement is to educate you and help you avoid future financial difficulties. There are new rules and regulations that apply to the organizations that provide these credit counseling and debtor education courses -- some of the rules might impact you if you are filing a bankruptcy.
The Credit Counseling and Debtor Education Requirements in Bankruptcy
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a series of laws which made it more difficult to file any type of bankruptcy, and which also added additional requirements for debtors before filing and before receiving their bankruptcy discharge.
Among other changes, the BAPCPA requires debtors to complete both a pre-bankruptcy credit counseling workshop and a pre-discharge education course from a provider approved by the U.S. Trustee. The credit counseling workshop is intended to give the debtor a better idea of how to create a manageable budget based on the debtor's finances. It is also supposed to provide viable alternatives to bankruptcy, depending on the debtor's situation. (For details, see What Happens During Pre-Bankruptcy Credit Counseling?) The predischarge debtor education course teachers bankruptcy filers about financial management and includes an exam at the end. The goal of this course is to help the debtor avoid financial trouble in the future.
These courses, which generally cost between $25-$55 for consumers, can be taken in person, but most often are taken over the phone or online. Once a consumer completes a course, a certificate is provided, and filed in the bankruptcy case to demonstrate compliance.
The courses are given and administrated by private companies, many of which have created large and successful businesses out of the fees received from consumers for the courses. Many also have developed referral networks with bankruptcy attorneys.
The new rules deal with some of the operations and charges of these course administrators.
The New Rules for Credit Counseling and Debtor Education Providers
Although many of the new rules have to do with the internal structure of the course administrators, many deal more directly with matters that affect consumers. Some of these are listed below.
Protection of Your Financial Information
In order to take the courses, consumers must provide the provider with private financial information. The new rules strictly prohibit the course provider from selling or disbursing your private information without your express approval. That approval must be in writing—not by clicking a box on a website.
The rules also prohibit the course administrators from soliciting you with offers or ads, based upon the information you provide to them.
Disclosure of Rates
In order to entice attorneys to refer clients to them for the counseling courses, many course administrators offer reduced rates to clients referred to them by an attorney. Although many attorneys pass that savings on to you, some don't. Prior to the rule change, there was no restriction on the attorney collecting the full price for the course from you, and then keeping the difference between the discounted rate and what they charged you.
The new rules require that the course administrators tell you how much they charged the attorney for you to take the course. If your attorney charges you more, you can ask why.
Cost of Consumer Counseling and Debtor Education
The course administrators now can charge up to $50, without having to justify the amount they are charging to the U.S. Trustee’s Office. In current practice, most course administrators do not charge more than $50, but this rule will make it more difficult for providers to inflate the charges in the future.
Consumers are also able to waive the fees (not pay them) for the credit counseling and debtor education courses if their household income is less than 150% of the poverty guidelines. Most consumers that qualify for a fee waiver for the filing of the bankruptcy itself will qualify for the waiver of the expenses related to the course.
Information Tailored to Each Consumer
The debtor education and financial counseling courses must now provide information specific to each consumer's situation. In the past, many courses gave each bankruptcy filer the same auto-response or stock form. Now, the course provider must give each debtor an actual analysis, with an evaluation specific to that consumer's situation.
Additionally, most of the courses require the consumer to take a test when done with the course. Under the new rules, if a consumer fails a course, the course administrator must make direct contact with the consumer, by phone or email. It is not enough to provide a computer generated response to a consumer that fails a test.
Will the New Rules Increase Prices?
While this seems like a good idea, the need for case-by-case analysis and direct consumer follow-up may require additional staff and resources, which could increase the costs needed to administer the courses.
Most consumers will not directly notice the effects of the new rules, and in fact, many are simply implementations of already existing temporary rules. However, many of these organizations currently charge relatively modest sums, and it remains to be seen whether the increased regulation will drive up prices.
One benefit of the new rules is that any attempt to increase rates above $50 per course will require the course administrators to justify the increased costs. However, because anything up to $50 is presumed reasonable without the need for explanation of rate increases, it is also possible that many course providers will automatically raise prices to the maximum $50. As it stands now, there is likely enough competition in the market (especially with declining bankruptcy filings) that many providers will stay at or near their current rate for the time being.