Bankruptcy petitioners all have one goal: getting out of debt as quickly as possible. That objective is reached through discharge, a court order that releases a debtor from obligations to repay specific unsecured debts. It prevents creditors or collection agencies from collecting debts through legal action or communication, such as phone calls, letters or personal contact.
Though the goal is clear, the path to a discharge is often complex and it behooves petitioners to understand the bankruptcy process and its potential pitfalls.
Discharged debts are no longer collectible. Bankruptcy judges decide how much a petitioner can afford to pay creditors, through either a payment plan or a discharge. A discharge order often requires that the petitioners sell personal assets to partially repay the creditors, but when the court-mandated payments are made, the debts are permanently gone.
Though bankruptcy discharges clear away debt, their terms are strict and require that petitioners follow court orders. Usually a judge appoints a trustee to make sure the order is followed. If you don’t cooperate with the bankruptcy trustee in liquidating personal assets, or you committed fraud in obtaining the discharge, the trustee may ask the court to revoke the order.
Debtor Education Required Courses
Before having your debts discharged, you must embark on a long and sometimes tedious process that includes two financial education courses.
The first is called the pre-filing credit counseling course, which you must take before you file for bankruptcy.
The second is the pre-discharge bankruptcy education, commonly called “Debtor Education.”
The debtor education course is taken after you file for bankruptcy but before your case is discharged. You must enroll in a course offered by an agency that is approved by the Office of the U.S. Bankruptcy Trustee. If you can’t afford the course’s cost, you will be allowed to pay what you can afford on a sliding scale. Course costs vary, but the Executive Office for U.S. Trustees (EOUST) says that courses costing less than $50 are reasonable. Any bankruptcy education provider that wants to charge more than that needs approval from EOUST.
You can take the course in person, by phone or on the internet and the instructor will provide all required materials. Online and phone courses require satisfactory completion of a test.
If you are married and both you and your spouse are going through bankruptcy together, you can take the pre-discharge course together or separately.
Bankruptcy courts require successful completion of both courses before your debts can be discharged.
Requirements for Pre-Discharge Bankruptcy Education
The material presented in pre-discharge bankruptcy education classes is focused on teaching the consumer how to create a budget (and live with it!), plus rebuilding credit after bankruptcy so that it becomes a useful part of your financial future. It’s important that you take the course after you file for bankruptcy but before your case is discharged.
It includes a mandatory topic called “Coping with unexpected financial crisis.” The material must include how to identify alternatives to borrowing when faced with an unanticipated crisis and how to get advice from public and private agencies on dealing with a financial crisis.
Some of the other subjects covered in the classes include:
- Setting short and long-term financial goals
- Calculating the difference between gross and net monthly income
- Identifying fixed and variable monthly expenses
- Keeping accurate financial records
- Distinguishing between wants and needs
- Comparison shopping
- Wise use of credit
- Saving for emergency situations
- Checking credit scores.
The course is taught in person, online or can be done over the phone. It must last at least two hours and be administered by an agency approved by the Office of the U.S. Trustee. The teachers should provide learning material before the class begins, provide instruction on how to make use of those materials and offer tests to measure your comprehension of the material.
If you fail a test, you must speak with an instructor from the company that administered the program to discuss the problems you had with the material.
When you complete the course, you will receive a certificate verifying that you passed the course. In order to have your debts discharged, you must file that certificate of completion with the court. It can’t be faxed or emailed to the court. It must be filed with all other papers or your bankruptcy will not be discharged.
Frequently Asked Questions about Debtor Education
What is “debtor education”?
Debtor education is one of several names associated with the mandatory credit counseling required for a consumer to have his bankruptcy discharged. Teachers give a minimum of two hours of instruction on how to manage money, repair credit and plan successful financial strategies after bankruptcy.
Do I have to take the credit-counseling course if I’ve already taken it?
The two counseling sessions cover different subjects. The one you took before filing – called the pre-file bankruptcy credit counseling – is designed to explore options other than bankruptcy for solving your problem. The pre-discharge debtor education course is designed to teach you how to stabilize your financial situation after bankruptcy.
Can I just take both at the same time?
No. The two can’t be taken simultaneously. Pre-file bankruptcy credit counseling must take place 180 days before you file for bankruptcy. Pre-discharge debtor education must be completed within 60 days after your first meeting with creditors for Chapter 7 bankruptcy. For Chapter 13 bankruptcy, you must complete the course before making your final payment.
Can I take the two education courses online?
Yes. They are available online, in person or over the phone. Contact a credit counseling service approved by the U.S. Trustees to schedule your counseling session. Classes run a minimum of two hours.
How much does it cost for pre-file and pre-discharge courses?
The fees for the two courses vary, but should cost around $50. If you have a problem affording that, there are provisions for having the fees waived.
What is bankruptcy discharge?
That is when the court orders that the consumer is no longer legally required to pay his debts. The court must grant the discharge and it is permanent, meaning creditors can’t take any action against the debtor to collect.
How long does it take to have debts discharged in bankruptcy?
Chapter 7 bankruptcy cases normally are decided in 4-6 months. Chapter 13 bankruptcy is set up to pay off debts in 3-5 years.
What is a bankruptcy trustee?
A trustee is an impartial party appointed to liquidate the debtor’s non-exempt assets. The trustee sells the assets and distributes the money to creditors. The trustee also can attempt to recover property that he believes was fraudulently disposed of by the debtor.
What forms do I need to file?
When you complete the first course – pre-filing bankruptcy credit counseling – you receive a certificate that you, or your attorney, must include when filing for bankruptcy. The same situation exists after completing the second course – pre-discharge debtor education, which is sometimes referred to as Financial Management. After you complete the course, you will file a Form 423, Certification of Financial Management Course, with the bankruptcy court. If you filed a Chapter 7 bankruptcy, you’ll have 45 days to file the completion certificate after you finish the course. For Chapter 13 cases, the certificate must be filed by the time you make the final payment under your judgment.
What happens to my credit score if I get bankruptcy discharged?
It suffers. Depending upon where you started from, your credit score likely will drop 100-150 points or more following bankruptcy discharge. The higher your score was before filing, the more it will drop. Also, be aware that Chapter 7 bankruptcy information will stay on your credit report for 10 years. If it’s Chapter 13, it will remain there for seven years.
More information about the requirements and procedures related to filing bankruptcy can be found at InCharge’s bankruptcy education page. InCharge offers a bankruptcy education and other personal finance courses at www.PersonalFinanceEducation.com