Since 2005, individuals filing for bankruptcy under Chapter 7 or Chapter 13 must receive “credit counseling” from an approved agency before filing a petition. Failure to do so can result in dismissal of the person’s case. The stated purpose of credit counseling is to ensure that consumers make an informed decision and consider other viable options before filing for bankruptcy. Two years after the credit counseling requirement took effect, the U.S. Government Accountability Office (GAO) studied the value of credit counseling to debtors, including whether it had been effective in steering consumers toward the best options for their individual financial situations. Around the same time, the U.S. Trustee Program (USTP) commissioned the RAND Corporation to determine how to identify and measure the effectiveness of pre-bankruptcy credit counseling. Both studies resulted in inconclusive reports.
Consumers must receive credit counseling from a USTP-approved agency before they can file a bankruptcy petition. During the counseling session, a counselor reviews the consumer’s financial situation and any factors that might have contributed to it. This could include an analysis of the consumer’s budget and the presentation of various options, up to and including bankruptcy. The counseling agency cannot advise the consumer on specific questions of bankruptcy law, including whether or not the consumer should file.
The GAO issued a report in April 2007 on the value of credit counseling to debtors. It described the purpose of the counseling requirement as “help[ing] consumers make informed choices about bankruptcy and its alternatives.” While the approved agencies generally complied with the statutory conditions, including the content of the counseling sessions, the GAO concluded that counseling was not helpful to most debtors. It found that anecdotal evidence suggested that many consumers had reached a point where they had no viable options except bankruptcy, minimizing the value or effectiveness of the counseling.
The USTP tasked RAND with answering three questions: how to identify “effective” credit counseling; how to measure that effectiveness; and whether the “mode of delivery” of the counseling, such as in person or via the internet, impacted its effectiveness. RAND concluded, in part, that the USTP had yet to identify its own explicit goals for consumer credit counseling, and that this made identifying “effectiveness” difficult if not impossible. It also found that uniform standards do not exist for defining the effectiveness of various types of counseling, such as general credit counseling, pre-purchase homeownership counseling, or courses of financial literacy. In-person counseling, according to research available at the time of the report, was considered the most effective form of delivery, but RAND noted that very little empirical research existed on internet-based counseling.
A bankruptcy filing may bring some relief to an individual whose debt is too great to pay from available income. A debtor may be able to restructure bill payments to something more manageable, eliminate some or all dischargeable debts by filing for Chapter 13 protection, or eliminating certain debts entirely in a Chapter 7. Bankruptcy attorney Devin Sawdayi has over sixteen years’ experience helping clients in the Los Angeles area through the bankruptcy process. To schedule a free and confidential consultation to see how we can assist you, contact us today online or at (310) 475-9399.
“Bankruptcy Reform: Value of Credit Counseling Requirement Is Not Clear” (PDF file), United States Government Accountability Office, GAO-07-203, April 2007
Clancy, Noreen and Stephen J. Carroll, Prebankruptcy Credit Counseling (PDF file), RAND Corporation, 2007
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Credit Counseling and Debtor Education Requirements in Personal Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, December 20, 2013
Evictions During Bankruptcy Under California Law, Los Angeles Bankruptcy Lawyer Blawg, November 29, 2013
Chapter 7 Bankruptcy Case Delayed Because Debtor Did Not Personally Sign Petition, Los Angeles Bankruptcy Lawyer Blawg, October 25, 2013