Bankruptcy is a legal way to start all over again financially, but you can’t file for a do-over until you have enrolled in a pre-file bankruptcy credit counseling course.
The pre-filing course only takes about an hour and it makes you aware of all the other possibilities for dealing with your debt. Federal law mandates that you take the course. That’s how serious a subject bankruptcy is.
There were 757,497 consumer bankruptcy filings in 2019, according to the American Bankruptcy Institute, only 2,144 more than in 2018. But other than that small increase, bankruptcy filings have fallen every year since 2010, when 1.5 million people filed.
While bankruptcy filings have dropped almost 50% in the past nine years, that’s still a lot of people ready to cash out on everything they own (Chapter 7 bankruptcy) or try to buy some time to protect what they have while they figure out how to pay their debts (Chapter 13 bankruptcy).
Chapter 7 bankruptcy cases take 4-6 months to settle and Chapter 13 filings can last a year or more. The secret to success with either is almost always predicated on the time spent planning ahead of the actual filing.
“It all depends on how you treat the pre-bankruptcy planning,” David Leibowitz, a bankruptcy attorney in Chicago and founder of the Lakelaw firm, said. “Good pre-bankruptcy planning is great. Bad bankruptcy planning can result in losing your discharge and maybe even going to jail.
“You can either do some smart things that will really help your case or you can do things that will get you in serious trouble.”
What Is Pre-File Credit Counseling
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act made it a requirement that anyone filing for bankruptcy must take a credit counseling session at least 180 days before filing.
Pre-file credit counseling is an opportunity to receive advice from an approved counselor on whether there is some other way for you to get back on your feet financially, or is bankruptcy really the only choice.
You are not required to accept any suggestions or proposals made by credit counselors, but are required to participate in what usually is a 40-60 minute session. The counseling can be done in person, over the phone or online.
The counseling must come from a nonprofit budget and credit counseling agency like InCharge Debt Solutions that is approved by the U.S. Trustee program. The agency issues you a Certificate of Credit Counseling as proof that you took the course and you must present the certificate when filing for bankruptcy.
Everyone filing for bankruptcy must take the credit course, regardless of what chapter of bankruptcy you file for. If you don’t have a certificate, your case may be dismissed.
A separate counseling session, called “Debtor Education” or “Post-Discharge Counseling” is required after you have filed your petition for bankruptcy. This is entirely different than the pre-bankruptcy credit counseling. It focuses on financial management, how to budget and other things you need to know to manage your debt successfully.
The two courses can’t be taken at the same time.
How It Works
The first step any consumer should take when considering bankruptcy is to determine whether they qualify for it. Some financial problems are better handled through debt management programs, debt settlement or even a consolidation loan.
Bankruptcy is the “nuclear option” when you have exhausted all other avenues for resolving your debt problems.
You should also understand that bankruptcy is a legal status. A judge rules on it, deciding whether the evidence you present means you are unable to pay the debts you accumulated.
In other words, you don’t declare bankruptcy and hope all your creditors (and bills) go away. You file for it, make your case in front of a judge and hope the judge grants you a fresh start.
That means examining your assets and measuring them against your expenses and seeing if there isn’t some way to balance the two without declaring bankruptcy.
To start pre-bankruptcy credit counseling, you’ll need to provide some information to counselors including:
- Income documentation such as W-2s, paystubs, Social Security payments, alimony, and child support.
- Expenses such as mortgage or rent payments, food, insurance, childcare, utilities, and transportation. Your checkbook could help calculate your expenses.
- List of debts owed, such as statements for credit cards, student loans, auto loans, and loans against a 401(k) retirement plan.
Next, you’ll chat with a counselor, which is a mandatory part of the counseling. The counselor will review the documentation and go over payment options and other alternatives to bankruptcy.
For example, counselors may help you create a budget, or offer tips for handling auto loan delinquencies. They may offer other options such as debt management programs to deal with credit card debt.
Once you’ve talked with a counselor, you’ll receive a certificate of completion that you must present to the judge when filing for bankruptcy.
Important Factors to Consider Before Filing Bankruptcy
The pre-filing bankruptcy process includes decision making on an attorney, the type of bankruptcy you intend to file, the timing for filing and gathering proof of your debts. Here are things to think about before making a decision.
Do you need an attorney or not? Filing for bankruptcy without an attorney is called filing pro se. There were 38,235 Chapter 7 bankruptcy cases filed pro se in 2019. About two-thirds of them – approximately 25,503 – resulted in a successful discharge.
Filing for Chapter 13 bankruptcy is more difficult. Being successful by representing yourself in a Chapter 13 filing is close to zero. Of the 283,419 Chapter 13 cases filed in 2019, only 26,074 filed without an attorney. Only 365 of those – 1.4% — were successfully discharged.
Do you want to file Chapter 7 or Chapter 13? Chapter 7 bankruptcy helps consumers who can’t afford to repay their debts. They can keep possessions that are exempt and get a new start by discharging or forgiving most of their unsecured debts — credit cards, personal loans and medical debt. Chapter 13 bankruptcy is meant for people with enough assets and income to repay all or most of their debts through a repayment plan.
Consider the timing of your bankruptcy. A successful bankruptcy case discharges only the debts that exist on the day you file. If you expect to have continuing medical costs, for example, you might want to wait until all costs are in. Similarly, if you just had a windfall of money like a tax return or inheritance, it might be best to wait before filing.
Take a “Means” Test. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires you to take a means test to see if you’re even eligible to file for bankruptcy. You calculate your income for the last six calendar months and see how it compares to the median income for your state. If it’s below the state average, you qualify to file Chapter 7. If it’s above, Chapter 7 is out, but you can still file Chapter 13. You also could qualify if your disposable income – the amount left after subtracting reasonable monthly expenses from monthly income – does not meet certain standards.
Start gathering proof. Bankruptcy is a legal proceeding so any claims you make about expenses or income must be backed up with paperwork. Typically, this takes a considerable amount of time so if you’re even lightly considering filing, you should start putting together everything that proves you need the protection bankruptcy provides.
Bankruptcy isn’t always the best debt relief option. InCharge Debt Solutions can help with credit counseling and preparing a budget. InCharge’s nonprofit debt consolidation program can reduce credit card debt by helping you lower interest rates and consolidate payments.
Pre-Bankruptcy Planning Tips
Before filing for bankruptcy, make a list of your assets to determine which are considered exempt (protected) and non-exempt (unprotected). You may want to consult an expert in bankruptcy law to review them.
Generally speaking, you are best served by liquidating non-exempt assets and using whatever cash you have available to pay down exempt assets. This is legal as long as the money is used for reasonable living expenses like mortgage, food, transportation or utilities.
Here are some ways to do that:
- If you own stocks that are not part of your exempt retirement plan, you could sell them and apply the money to your mortgage.
- Sell an expensive car you own that has significant equity. It’s OK to do this if the money is used to purchase a less expensive car and what’s left over is applied to other living expenses.
- Move your savings and checking accounts to a different bank. If either account is at the same bank as your car loan or credit card, the bank can use the money to pay down the balance owed on the date you filed bankruptcy.
- Stop automatic payments from your bank account. This allows the money to be used for living expenses.
Be careful not to cross the line to conceal assets. Fraud, theft and lies are not tolerated well in bankruptcy proceedings. Creditors can ask a judge not to discharge a debt – or even all the debts – if the creditor believes there was abuse involved with it.
Things You Should Not Do Before Filing for Bankruptcy
Preparing to file for bankruptcy isn’t easy. If you’re wondering if you’ve crossed the line when trying to protect assets before filing for bankruptcy, here are a few examples … or warnings!
- Choosing who to repay and who not to repay. If you intend to use money or property to settle some debts before filing for bankruptcy, you should treat all creditors equally. If you show a clear preference in who you paid before filing, the bankruptcy trustee could come back and take back all or part of the money.
- Paying your brother back for a personal loan he made to you, but refusing to make an installment payment on a car or credit card payment is an “avoidable preference” and may end up being nullified by a bankruptcy trustee.
- Don’t “give” your assets to friends or relatives before filing for bankruptcy. It is fraud to give the keys to your paid off car to your nephew, or to give a gold, diamond ring to your daughter or give your best friend a 50% discount on a lake house.
- Don’t go on a shopping spree with your credit card before filing for bankruptcy. While your credit card debt will be discharged when you file, using a credit card to pay for a vacation may be regarded as defrauding the system.
- Give away property or repay debts to relatives or friends at least one year before filing for bankruptcy.
- Transfer your assets while you’re still solvent. You are considered solvent when your assets exceed your liabilities.
“The most important thing about this is don’t try to hide assets, don’t try to transfer them to family, friends or some relative because nobody knows about them,” Leibowitz said. “This is something people do a lot of times and all they end up doing, is getting themselves in trouble.”
Start Your Pre-Bankruptcy Credit Counseling
Pre-bankruptcy planning can be the difference between having a bankruptcy filing approved or denied. Pre-file counseling can help you decide if bankruptcy is the right option for you.
Online bankruptcy education offers the assistance of a Certified Financial Counselor to help you build an accurate picture of your financial situation. You’ll then get advice on how to improve it, including alternatives to bankruptcy.
A credit counselor at InCharge can provide pre-file counseling to help you create a budget, analyze your debt, and come up with an action plan to deal with debt or decide if you should file for bankruptcy.