What Is Bankruptcy Counseling?

What Is Bankruptcy Counseling? article image.

Filing for bankruptcy is a serious decision with major consequences, and it's one the government won't let you make on a whim. Before you file for bankruptcy, you'll be required to go to credit counseling to ensure that the drastic move is appropriate in your case.

Due to the long-lasting negative effects it often has on a person's credit and financial life, bankruptcy is typically viewed as a last-resort option. Giving it careful consideration and evaluating all of your other options is an important step before making a final decision.

How Does Bankruptcy Counseling Work?

As part of the bankruptcy process, the federal government requires that you complete two credit counseling sessions: one before you file your case and another before your debts can be discharged.

These sessions are meant to educate you on how bankruptcy works and whether it's the right choice for you. They'll also provide knowledge you can use when making financial decisions in the future.

Here is an overview of how each of these counseling sessions work.

Pre-Bankruptcy Counseling

Similar to other types of credit counseling, pre-bankruptcy counseling involves meeting with a credit counselor and having a frank discussion about your financial situation. Meetings with credit counselors typically take about an hour and can take place over the phone or in person.

During this session, your counselor will review your finances and go over your options with you, including any alternatives to bankruptcy you may have. If they feel you can remedy your debts without resorting to bankruptcy, they can help you develop a budget and a plan to repay your debt as well as a long-term strategy to improve your chances of success.

Credit counselors may charge a fee (roughly $25 to $50) for their services, and if you can't afford it, you may be able to ask for a waiver. Make sure to discuss any fees the organization might charge before you begin, and be sure to confirm that your counselor or counseling agency has been approved by the U.S. Department of Justice for pre-bankruptcy counseling.

Post-Filing Debtor Education

After you've filed for bankruptcy, and before your debts are discharged, the federal government also requires you complete a debtor education course. These courses teach you the fundamentals of developing a budget, managing your money and using credit responsibly. If you don't complete this step, you won't be able to move forward with your bankruptcy case.

Your debt education course needs to be government-approved, so make sure to use the list of approved resources from the U.S. Justice Department linked below when searching for a program in your area. Once you complete the course, be sure to get a certificate of completion as you'll need this during your bankruptcy proceedings.

Where to Find a Bankruptcy Counselor

Both pre-bankruptcy counseling and post-filing education must be completed with government-approved counselors or education providers. All of the approved counselors and educators must be listed with the U.S. Trustee Program in order to issue official certificates of completion.

You can find a list of approved credit counselors and debtor education programs on the U.S. Department of Justice website. When searching for a credit counselor on your own, be sure to refer to these resources, as there are many credit counselors and debt educators not included on the approved list and therefore not usable for the bankruptcy process.

As you look for a credit counselor, make sure you're considering ones located in your judicial district. You will find this information on the U.S. Department of Justice's website as you search for approved counselors in your state.

Once you find an approved counselor in your area, ask them some questions to get an idea of what they offer and if you feel comfortable with them. You can ask them what fees they charge and how they can help you plan for the future to get an idea of if they are the right fit.

How to Rebuild Your Credit After Bankruptcy

Bankruptcy tends to have catastrophic effects on credit, so it's important to begin immediately working to rebuild your credit after your case is complete and your debts have been discharged. Bankruptcy records remain on credit reports for seven or 10 years—depending on the type of bankruptcy—so the faster you get started, the better off you'll be.

Even while a bankruptcy record is still on your credit, you should be taking care to establish a solid record of on-time payments and evidence that you've been managing your debt responsibly. Lenders will look for proof they can trust you with new debt, so anything you do post-bankruptcy will factor into new credit applications. Here are a few strategies to consider as you rebuild credit after a bankruptcy:

  • Check your credit reports and scores. After your bankruptcy case is processed, your credit will likely have taken a substantial hit. Check your credit reports and scores as soon as you can to understand how bankruptcy has affected your scores and what other factors in your reports may be bringing your score down.
  • Apply for a secured credit card. Depending on the type of bankruptcy you file, you may end up having to close all of your accounts. And since your credit will have taken a hit, you may have a harder time being approved for new cards. To start rebuilding your credit, consider applying for a secured credit card. A secured card requires a security deposit and may come with a low credit limit, but your responsible use of the card will help you build a record of positive payment history that can help your scores. Eventually, you may be able to graduate to an unsecured card through the same issuer or by applying for one separately.
  • Make sure to pay on time. Payment history is the most important aspect of your credit score, so it's imperative you make all your payments on time. Your payment history is even more important if you have a bankruptcy in your past, as lenders will look for signs that you are using debt responsibly when they consider you for new credit.

How to Avoid Bankruptcy

The easiest way to insulate your credit from the effects of bankruptcy is to avoid it at all. Though it may seem difficult, it's possible to resolve debts on your own by sticking to a detailed budget and a disciplined repayment plan.

If you want to remedy your financial situation but aren't sure how to start, consider reaching out to a credit counselor to see what they suggest. These counselors can help you organize your debts and create a repayment plan.

If you want to take on the challenge by yourself, look over the following steps for an idea of how to get started:

  1. Take an inventory of your finances. The first step to tackling debt is understanding how much you owe. Take inventory of all of your debts and bills, and add up how much you need each month to cover all of your responsibilities.
  2. Make a budget. Once you know the total of all your monthly bills, subtract this from your monthly income. If there is money left over, consider putting this toward your debt so you can save on interest and cut down on the time you're in debt. Your budget may also include savings, investments or other allocations, but it can be worth it to divert those funds temporarily and apply them toward your high-interest debt balances.
  3. Create a debt repayment plan. Your budget should give you an idea of what bills you're able to pay, and how much you can put toward them each month. If you're able to pay more than the minimum payments toward your outstanding balances—great. If not, try your best to make at least the minimum payment so you can avoid incurring late fees.
  4. Hold yourself accountable. Creating a budget and payment plan is only half the battle. The second part is sticking to your plan and having a strategy to hold yourself accountable. Paying down a mountain of debt takes time, and even small deviations can derail progress. Once your debt is paid off, do things differently this time to make sure you don't simply build it back up again.
  5. Look into financial assistance programs. These programs exist to help those in need, and if you fear you're nearing bankruptcy, now might be the time to look into what's out there. Help is available at the national, state and local levels, and could help you find food, make rent payments or receive monetary aid, for example.

Whether you have a bankruptcy in your past or have mounting debt and believe a bankruptcy may be your only option, it's always good to monitor your credit reports and scores to see how your financial situation is impacting your credit. You can get a free copy of your credit reports and scores from Experian.