Credit Counseling: What Is It and Why Do I Need It?

If you’re an individual or a couple planning for file for Chapter 7 or Chapter 13 bankruptcy, you’ve probably been advised that you’ll have to complete a credit counseling session with an approved provider before you file. If you’re like many bankruptcy petitioners, you may be asking “why?” 

Credit Counseling is Required before Filing Bankruptcy in Nevada

The simplest answer to “Why do I have to complete credit counseling before filing bankruptcy?” is that with extremely limited exceptions, your bankruptcy case will be dismissed if you file without a certificate of completion. Although section 109(h) of the U.S. Bankruptcy Code lists several exceptions to the credit counseling requirement, most have been largely eliminated as a practical matter. These exceptions were based largely on lack of access, either because there weren’t sufficient providers in an area to meet the need or because the debtor had attempted to arrange credit counseling services but was unable to schedule a session within seven days of the request.

With the widespread availability of online and telephonic options, these issues rarely if ever arise today. There are dozens of agencies approved to provide pre-bankruptcy credit counseling services in Nevada.

The only other exception is for those “unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone.” In short, nearly everyone planning to file for bankruptcy as an individual or couple will be required to complete credit counseling.

Where Does Credit Counseling Fit in the Bankruptcy Timeline?

Credit counseling must be completed within the 180-day period before the bankruptcy petition is filed. The certificate of completion must be filed with the bankruptcy petition. As a practical matter, though, credit counseling is usually completed shortly before filing of the petition. That’s because most people don’t sign up for credit counseling until they’re prepared to file for bankruptcy and need to check off the credit counseling box. 

The Rationale Behind the Credit Counseling Requirement

The credit counseling requirement wasn’t intended to be just a hoop debtors had to jump through in order to move forward with bankruptcy. The theory was that requiring people who were struggling financially to go through credit counseling in advance of bankruptcy might allow some of those debtors to find better solutions. 

Credit counseling wasn’t created for people considering bankruptcy–many non-profit organizations were providing this type of service to people facing financial hardships long before the pre-bankruptcy requirement. So, it makes sense that this type of guidance might help some bankruptcy petitioners to identify other workable options. Credit counseling also offers people considering bankruptcy an additional source of information about the pros and cons of bankruptcy, although your bankruptcy attorney will provide more detailed information about the process and effects of bankruptcy.

However, there’s little evidence that the pre-bankruptcy credit counseling requirement has had any significant impact in terms of helping participants find other solutions. In fact, 18 months after the credit counseling requirement went into effect, the U.S. Government Accountability Office (GAO) made a report to members of Congress. The report was tellingly titled BANKRUPTCY REFORM: Value of Credit Counseling Requirement Is Not Clear, and contained this conclusion:

We also found that the value of the prefiling credit counseling requirement is not clear. The requirement was intended to provide consumers with information about bankruptcy and its alternatives so they can make informed decisions about their options. In practice, however, anecdotal evidence strongly suggests that most consumers have no realistic alternative to bankruptcy by the time they receive the counseling.

Though the report was published more than a decade ago and relied on preliminary data, the core issue with the effectiveness of the requirement remains the same: by the time someone struggling with debt reaches the point of preparing to file for bankruptcy, the situation has often worsened to the point where bankruptcy is the best option.  

What to Expect During Credit Counseling

The credit counseling session typically takes about 90 minutes, is inexpensive, and can usually be completed online or over the telephone. Although some people find the idea of credit counseling stressful, there are no wrong answers. You’ll read information and answer questions about your income, debts and spending habits. After you’ve provided the necessary information, you’ll have a brief chat with a credit counselor, who will review the information you submitted and talk with you about bankruptcy and possibly alternatives.

What is Debtor Education?

One point of confusion for many bankruptcy petitioners is that there are two separate educational requirements: credit counseling pre-filing and debtor education pre-discharge. In a Chapter 7 case, the time between completing credit counseling and taking the debtor education course is often very short.

Although there is some overlap in information between credit counseling and debtor education, the goals are very different. While credit counseling is designed to help people make informed decisions about whether to proceed with bankruptcy or another strategy for overcoming debt, debtor education is geared toward the future. The content focuses on issues like cutting expenses, creating and maintaining a budget, and managing credit to help make the most of the fresh start bankruptcy offers.

Learn More about How Bankruptcy Can Help You Rebuild

The first step toward learning how bankruptcy can set you on the path to a more stable financial future is to talk with an experienced Las Vegas bankruptcy attorney. Haines & Krieger offers free consultations to Nevada residents considering Chapter 7 or Chapter 13 bankruptcy. Schedule yours right now by calling 702-903-1459 or filling out the contact form on this page.