Filing for bankruptcy is a legal step that some people take when debt becomes unmanageable. Before doing so, federal law requires individuals to complete a credit counseling session through an approved agency. This session reviews your finances and outlines possible debt relief options, including bankruptcy. It can help you understand your situation and learn about other tools that might be available.
How Credit Counseling and Bankruptcy Work Together
What Is Credit Counseling?
Credit counseling is a service that helps people understand their financial situation and consider ways to manage debt. It’s usually offered by nonprofit agencies and includes tools like budgeting help, education, and sometimes a plan for repaying what you owe.
What Services Do These Agencies Offer?
Approved credit counseling agencies may offer several types of support to help you manage your finances. These services can include:
- Budget support: A counselor can help you build a monthly budget based on your income, expenses, and goals.
- Debt management plans (DMPs): Some agencies work with creditors to combine your unsecured debts into a single monthly payment.
- Financial education: Many offer workshops or one-on-one sessions to teach basic money management skills and strategies for avoiding future debt.
Why Credit Counseling Is Required Before Bankruptcy
Before you can file for bankruptcy, you must complete a credit counseling session through an agency approved by the U.S. Trustee Program. This step is required by law and must be done within 180 days before filing. The goal is to make sure you understand your options and whether bankruptcy is the right legal path for your situation.
What Happens During the Session?
A credit counselor will review your income, expenses, and debts. They’ll talk through your financial picture and explain options that may be available, including bankruptcy or other ways to manage what you owe.
How Much Does It Cost?
Costs vary depending on the provider, but many agencies charge between $10 and $50 for an individual session. Some may charge up to $100 or more, especially for joint sessions or additional services. If you’re facing financial hardship, you may qualify for a lower fee or a waiver. Approved agencies must disclose their fees upfront and cannot deny service based on inability to pay.
Where Can You Take the Course?
Most approved agencies offer the session online, by phone, or in person. To count toward your bankruptcy filing, the session must be completed through an agency that’s listed with the U.S. Trustee Program.
How Credit Counseling Supports Informed Decision-Making
Credit counseling can help you better understand your financial situation and consider possible next steps. By looking at your income, expenses, and debts, you and the counselor can talk through different options and what might work best for your situation.
Looking at the Full Financial Picture
A counseling session is a chance to review your overall financial health. This includes how much you owe, what you earn, and where your money is going. Seeing it all in one place can make it easier to decide what steps to take next.
Exploring Other Debt Options
Counselors may also explain possible alternatives to bankruptcy. For example, if your situation fits, a debt management plan (DMP) could help organize your payments without going to court. These plans typically involve sending one monthly payment to the counseling agency, which then pays your creditors.
Understanding the Debtor Education Course (After Filing)
The debtor education course—also called the personal financial management course—is a required step for most people who file for bankruptcy.
What the Course Covers
This course teaches basic financial skills, like how to create a budget, manage credit, and make informed money decisions. It’s meant to help you build better financial habits after your bankruptcy case is complete.
When You Take It
You must take the course after you’ve filed for Chapter 7 or Chapter 13 bankruptcy but before your debts can be discharged by the court.
What Else to Know
- The course usually takes 1 to 2 hours and is available online, by phone, or in person.
- It must be completed through an agency approved by the court.
- After finishing the course, you’ll get a certificate that must be filed with the court.
Key Takeaways on Credit Counseling and Bankruptcy
Credit counseling and bankruptcy are connected steps in the legal process for managing serious debt. Credit counseling helps you look at your finances and consider your options before filing. If bankruptcy is the right path, the session can help you prepare.
After filing, the debtor education course focuses on basic financial skills to help you make informed decisions in the future. Both steps are required and must be completed through approved providers.
These courses are meant to provide useful information and help you move forward with a clearer understanding of your financial situation.
