A new law that came into effect on October 17, 2005 has made credit counseling compulsory before filing for bankruptcy.
Credit counseling mandatory for bankruptcy
Under the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, consumers are now required to go through a credit counseling program approved by the government within six months before they file for bankruptcy. The curriculum must get the approval of U.S. Trustee Program of the Department of Justice, which administers various aspects of the new law. The purpose of this law is to prevent people from using the system as a way to avoid their creditors. The devastation brought about by Hurricane Katrina forced the credit counseling requirement to be temporarily waived for consumers filing in Louisiana and the Southern District of Mississippi.
How the counseling is done
The mandatory credit counseling can take place in person, over the phone, and also online. In all likelihood, the session will last nearly 90 minutes and include an analysis of their budget. A credit counseling organization is expected to charge a fee of about $50 for its services. The amount will depend on location, services offered, and administrative costs. However, a credit counseling organization approved by the government will have to waive the fee for any person who cannot afford to pay. Once the counseling is over, consumers must be given a certificate as proof. Some organizations may charge an additional amount for the certificate also. Consumers should check carefully to make sure that they have got the correct certificate for the bankruptcy court in which they will be filing.
Credit counseling organizations offer advice to consumers on how to properly manage money and debts and develop a budget
. They usually offer free educational materials and workshops. On occasions, these credit counseling organizations may recommend and negotiate a debt management plan (DMP) for the consumers. In such a plan, consumers make monthly deposit with the organization, which is subsequently used to pay off the debts in accordance with a schedule that has been worked out with the consumers and their creditors. A DMP is not needed for those who are filing for bankruptcy; but in case consumers do use one, they are required to submit a copy of it to the court when filing for bankruptcy.
Opinions differ on the merits of the new law. While some welcome it as a right step against unscrupulous debtors, others are more skeptical about its success. It imposes too much burden on people already reeling under debt and makes filing for bankruptcy more expensive, feel many.