Bankruptcy
New bankruptcy law requires credit counseling
ByAmy Buttell Crane
Bankrate.com
Starting Oct. 17, the road to bankruptcy will run through consumer credit counseling agencies.
Provisions in the new bankruptcy law mandate credit counseling before a bankruptcy can be filed and a personal financial management seminar before a bankruptcy is complete.
And there ain't no free lunch -- most consumers will have to pay at least a nominal fee for both of these classes, adding to the financial burden of a bankruptcy filing. In fact, the entire process is about to get a lot more expensive and complex as a result of the new law. Known as Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it was passed by Congress in March and signed into law by President Bush on April 20.
Federal agencies, courts, attorneys and credit counseling agencies are scrambling to comply with the many changes in this new law, which include restricting the ability of debtors to wipe out their debts under Chapter 7, to file repeated bankruptcy petitions and to select a more favorable jurisdiction for bankruptcy filings.
Consumer advocates say the law imposes too many burdens on consumers overwhelmed by debt. Travis Plunkett, legislative director of the Consumer Federation of America, or CFA, notes that there are two critical issues in the credit counseling and personal financial management provisions: whether consumers can find a reputable agency that will actually help them deal with their debts and whether the timing is right for them to benefit from such help.
"If most people can't benefit, then this will be an expensive barrier to both getting into, and emerging from, bankruptcy," he says.
No one knows, yet, exactly how the law will affect consumers, because it is untested. "The law is designed to prevent debtors from using the system as a way to avoid their creditors," says Howard Ehrenberg, an attorney with SulmeyerKupetz in Los Angeles, and a member of the Chapter 7 Bankruptcy Panel of Trustees. However, it will take time for trends to emerge in how the law is actually interpreted by judges, he says.
Bankruptcy basics
Under U.S. law, there are a number of categories under which consumers, cities and
corporations can file for bankruptcy. Chapter 9 is reserved for municipalities,
counties and school boards; Chapter 11 is for corporations and Chapter 12 for farmers.
The consumer chapters are:
Chapter 7. Under Chapter 7, your assets -- if you have any, and except for certain types of property -- are liquidated and distributed to your creditors. Chapter 7 filers are released, or discharged, from many of their debts at the completion of their case.
Chapter 13. Under Chapter 13, you get to keep most of what you own and file a plan to repay your creditors over three to five years. Your bankruptcy isn't complete until you pay off all of your creditors according to your plan.
There are some debts that bankruptcy can't erase, including legal fees related to the bankruptcy filing, some taxes, student loans, alimony, child support and certain injury and criminal fines and claims.
As American consumers gorge on more debt, bankruptcy filings have skyrocketed and they are climbing even faster now as consumers race to file before the new law goes into effect. Filings were up 16 percent from the previous quarter as of June 30, according to a report from the Administrative Office of the U.S. Court. Chapter 7 filings are responsible for the increase, as the new law makes it tougher to qualify to file.
Contrary to popular belief, most bankruptcy filings aren't caused by credit-card misuse. A study published in Health Affairs in February concludes that half of all bankruptcies are caused by health problems and subsequent unemployment and cancellation of health insurance. The study also reveals that most of those filing for bankruptcy aren't serial deadbeats, but middle-class consumers who own their own homes.
Credit counseling briefing
Under the new law, consumers who want to file for bankruptcy must complete a credit
counseling briefing, designed to inform them of their options in dealing with their
debts, six months prior to filing. The course must be at least 90 minutes long and
can't cost more than $50. Accredited agencies can't turn anyone away based on their
ability to pay.
The briefing can be provided through one-on-one, in-person counseling; group classes or over the phone or Internet. The U.S. Trustee Program of the Department of Justice, which administers various aspects of the new bankruptcy law, must approve the curriculum.
Topics covered in the briefing include examining the underlying causes of a consumers' financial problems; a look at their budget, in terms of their income and expenses; helping them understand the debt-to-income ratio; providing guidance as to whether a debt-management plan will help the consumer; and the consequences of filing for bankruptcy and other alternatives to bankruptcy, according to Gail Cunningham, vice president of business relations with Consumer Credit Counseling Service of Greater Dallas, an agency that has applied to provide these classes.
Because of the fee-waiver requirement, and the fact that most people considering bankruptcy don't have a lot of money to spare, a good number of these briefings will take the form of online interactive classes, says Howard Dvorkin, founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla.
If a consumer works with a credit counseling agency's counselor who believes they could benefit from a debt management plan and draws one up, that plan must be included with the consumers' bankruptcy petition, even if the consumer doesn't believe he has the ability to meet the obligations of such a plan.
The timing issue
Consumer advocates question whether this credit counseling briefing will really
help consumers. "The question is whether the timing is right -- is this a good time
for a consumer to receive counseling or not," Plunkett says. "When they get to this
point, most consumers have already made the mental
decision to seek bankruptcy because,
in most cases, they learn about this provision through their bankruptcy attorney."
"So we wonder whether it is too late, because most people at this point face imminent
financial calamity," he says. "Timing is everything in credit counseling. If there
is early intervention, it can work, but if people get it after they have been laid
off, for example, they won't have regular income and can't benefit."
