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Why is credit counseling required before I file for bankruptcy?

Those who have been through the bankruptcy process know that one of the requirements is that one complete credit counseling and debtor education from an organization approved by the government both before the bankruptcy filing and before discharge. Programs which are government-approved should include the components required under bankruptcy law.

What exactly does one learn in pre-bankruptcy counseling and pre-discharge debtor education, and why are they an important part of the process? Beginning with pre-discharge debtor education, one receives guidance and education on things like budgeting, wise use of credit and other issues pertaining to money management. The idea is to ensure that those who have benefitted from the bankruptcy process have a basic understanding of how they can better manage their financial life, regardless of whether it was financial mismanagement that brought them to bankruptcy in the first place. 

Pre-bankruptcy counseling includes some of the same information as pre-discharge debtor education, such as budgeting and money management, but one of the really important components it includes is education regarding the alternatives to bankruptcy. This is particularly important, because debtors need to understand their options before they take the plunge into bankruptcy.

Alternatives to bankruptcy are not widely known to the public, though you can learn about them by doing a bit of research. Alternatives to bankruptcy, besides money management and personal negotiation with creditors, include things like debt consolidation or restructuring and debt counseling. To be sure, one has to be careful with such approaches to watch out for scams. In addition, these approaches don’t work for every debtor’s situation. For some, though, the relief offered by bankruptcy is not worth the credit consequences and less drastic measures can be beneficial.

Those who feel they can benefit from a bankruptcy filing should not hesitate to retain an experienced bankruptcy attorney for assistance in putting a filing together. Doing so will ensure their case receives the attention it deserves. 

Source: Federal Trade Commission For the Consumers, “Before You File for Personal Bankruptcy: Information About Credit Counseling and Debtor Education,” May 2006

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