“Credit counseling” is not really counseling. It’s not difficult, but a necessity before you can file a bankruptcy case.  

A person cannot file an individual bankruptcy case without first taking one easy but necessary prior step, one that is arguably nothing more than a bureaucratic formality. It CAN trip you up, though, and even cause significant problems if not done appropriately.  

The Legal Requirement

The part of the U.S. Bankruptcy Code titled “Who may be a debtor,” includes the following requirement:

“… an individual may not be a debtor under [the Bankruptcy Code] unless such individual has, during the 180-day period preceding the date of filing of the [bankruptcy] petition… received from an approved nonprofit budget and credit counseling agency… an individual  or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in preforming a related budget analysis.”

What “Counseling” Is Provided?

Not much.  It’s generally a simple procedure you do on the internet, or by phone if you prefer, in which you provide information about your debts, income, and expenses, and then are usually told that your income is not sufficient to pay for your expenses.

In truth, the main practical benefit from this “counseling” is that you get an emailed certificate stating that you’ve completed “credit counseling.” That certificate allows you to file bankruptcy. It is generally attached to your initial bankruptcy petition.

Timing is Crucial

As stated in the statute cited above, the “counseling” session must take place “during the 180-day period” before filing bankruptcy. So of course don’t do the “counseling” unless you expect to be filing bankruptcy within that length of time. But also be careful about putting it off too long—you don’t want to be in the position of needing to file bankruptcy in a hurry and not being able to.

Its Purpose

The stated purpose was to encourage people to think about pursuing alternatives other than bankruptcy. Some would argue that its real purpose was to put roadblocks in the way of people needing bankruptcy relief. At the very least, it is an impractical and ineffective disincentive.  

As to its effectiveness, a year and a half after the counseling requirement went into effect, the United States Government Accountability Office issued a report, which included the following assessment:

The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options.

Who To Contact to Get this “Counseling,” and How Much Does it Cost?

The “nonprofit budget and credit counseling agenc[ies]” which provide this service must first be approved by the U. S. Trustee. A list of the approved agencies for each federal district is provided on the U.S. Trustee’s website—click on your state and then be sure to look at the appropriate federal district if you state has more than one.

The listings do not provide the price of each agency’s “counseling” service. For this reason, and because there are confusingly many of them, varying widely in quality, convenience, and cost, it’s best to ask your attorney which one(s) he or she recommends.