What is bankruptcy counseling and do I need it?

Even if you have a pretty good handle on what bankruptcy is all about, and you’re confident it’s the best path for you to take, you’ll still need to take two bankruptcy counseling courses.

Every state requires you to take these courses to successfully go through personal bankruptcy. In fact, you’ll have to finish the first course, pre-filing credit counseling, before you file for Chapter 7 or 13 bankruptcy. The second course, a debtor education course, happens toward the end of the process, but before the court finalizes your bankruptcy and discharges your debt. If you’re married, and filing a joint bankruptcy petition, you and your spouse will both have to sign up.

Related article: How to file Chapter 13 bankruptcy

But if you’re imagining yourself sitting in a classroom for weeks on end, don’t worry. Many of the agencies offer these courses by phone and online. And each course is only one session long, lasting at most two hours. 

How do you sign up?

If you’ve decided to file for bankruptcy, you’ll need to find a credit counseling agency to work with. Bankruptcy counseling courses can only be taken through nonprofit credit counseling agencies that are approved by the U.S. Trustee Program, where you’ll find a list of approved agencies for pre-credit counseling and a list of approved debtor education course providers.

The exception is if you live in Alabama and North Carolina, where bankruptcy administrators are in charge of approving credit counseling and debtor education providers. You can choose from this list of approved providers.

If you’re working with a lawyer, he or she also might have a recommendation for a good agency.

Spend a little bit of time investigating the agency to make sure it’s a good fit. The FTC recommends calling a few companies and asking questions such as:

• What services do you offer?
• Will you help me develop a plan for avoiding problems in the future?
• What are your fees?
• What if I can’t afford your fees?
• What qualifications do your counselors have? Are they accredited or certified by an outside organization? What training do they receive?
• How do you keep personal information (address, phone number, financial information) confidential and secure?
• How are your employees paid? Are they paid more if I sign up for certain services, if I pay a fee, or if I make a contribution to your organization?

You can choose the same agency for both courses or switch agencies if you’re not happy with the one you used for the pre-filing course. The courses can’t be taken at the same time. As the names suggest, you must take pre-filing credit counseling before you file for bankruptcy and the pre-discharge debtor education course before your bankruptcy is complete.

Pre-filing credit counseling

The pre-filing counseling session will last about 60-90 minutes and usually costs $50 or less. Taking the course online tends to be the cheapest option, says Michael Bovee, Resolve co-founder. If you can’t afford the course fee, it may be waived or lowered if you meet certain criteria. You must take the course within 180 days of filing for bankruptcy.

The pre-filing course is meant to give you an overview of the bankruptcy process and information about alternatives to bankruptcy like a debt management plan. The counseling agency might come up with a repayment plan other than bankruptcy, but you aren’t required to follow it. Bovee says he’s not aware that anyone he’s worked with has ever changed his or her mind about filing for Chapter 7 bankruptcy after taking the class. 

After you finish the course, you’ll get a certificate of completion. You have to include that certificate with your bankruptcy filing paperwork no later than 15 days after you file.

Pre-discharge debtor education course

The second course you’ll need to take is the pre-discharge debtor education course. This session is about two hours long and usually costs $50 or less. Again, if you can’t afford the fee, see if you qualify to have it waived or reduced.

The pre-discharge course will include information on how to create a budget, manage your money and use credit smartly. If you successfully finish the course, you’ll get a completion certificate, which you’ll need to finish the bankruptcy process.

Taking the courses may seem like an additional hassle, but luckily, it’s a fairly simple, and not hugely time-consuming, process.