The new bankruptcy law makes it mandatory for individuals intending to file bankruptcy to undergo credit counseling session. According to Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, norms for filing bankruptcy has been made rigid for consumers. This step has been taken to ensure that debtors in real need of bankruptcy get an opportunity to “start afresh” financially. Many changes were implemented. One of them was introduction of credit counseling or pre-bankruptcy briefings for debtors before filing bankruptcy.

What does a credit counselor do?

A credit counselor will first assess your prevailing financial health. On the basis of your financial condition, he will suggest a method in which you can make your debts manageable. He will try to reduce your debt load by suggesting necessary changes in your financial habits. A repayment plan is often worked out so that you can pay off your debts as per the payment schedule.

The main aim is to prevent you from filing bankruptcy. However, there may be times, when your financial condition will leave you with bankruptcy as the only debt relief option.

How will a credit counselor help a debtor on the verge of filing bankruptcy?

Irrespective of whether you are planning to file Chapter 7 or Chapter 13 bankruptcy, you have to take pre bankruptcy credit counseling session from a credit counselor who is approved by the US Dept. of Justice’s Trustee program.

The credit counselor will explore possibilities to help you so that you can avoid filing bankruptcy. On the completion of the program, you will get a certificate that you have completed your pre- bankruptcy credit counseling. The certificate is valid for a period of 180 days, so you must file bankruptcy within this period.

The cost of pre- bankruptcy credit counseling session is USD$50. The session may last for one hour to 90 minutes. If it is found that a repayment plan isn’t enough to manage your debts, you can file bankruptcy. Depending on cash availability, you can either file Chapter 7 or Chapter 13 bankruptcy.

In order to qualify for Chapter 7, you need to pass the Means test, another change that has been introduced as per the BAPCPA 2005. Your median income is compared to the state median income. If it is found that your income is lower than the state median income, you are eligible for Chapter 7 bankruptcy or you file Chapter 13 bankruptcy to get rid of your debts.

Since bankruptcy damages your credit report for a period of 7 to 10 years, it is better to tackle your debts well in advance and if required, attend a credit counseling session to set your finances straight when you are anticipating financial crisis in near future.

Hunter had just graduated high school when he got his first credit card.  He was 18 and already living on his own, but he had no intention of going to college and so continued to work full time.  With his first credit card he began to realize that it was great for getting gas and buying fast food every night.  Things were great and he was enjoying being young and on his own.  However, after just a few moths his credit card balance exceeded $1000 and the monthly payment was almost $100.  He had a Visa, and when he contacted the credit card company for help the customer service representative offered him the same card terms on a new MasterCard.  So, of course, he took it – and within a week he had another card with a $1000 limit.

In addition to those cards, Hunter started getting other offers in the mail and within six months had five credit cards with a combined limit of $5000.  Life was good again, and he had the best of the best furniture and electronics for his apartment.  Hunter was a responsible young adult who works hard and pays his bills on time.  However, after awhile his second job started to slow down and before he knew it he did not have enough money coming in to pay all his bills.  Soon all of his credit cards went into default and his accounts were turned over to collection agencies.  The phone calls started coming and his credit score was dropping fast.  After months of trying to make it all work, he eventually had to move back home.  Moving back home eliminated his rent and utilities, but the credit card debt was still there.

Hunter did not know what to do, so essentially he just ignored these debts in the ensuing years.  As he grew into his twenties and started making better money, Hunter paid off his credit card debt and eventually got them off his credit report.  His credit score was back up and he was doing better.  He decided it was time to move back out, and since he was making more money and had good credit he rented a house.  At the same time he purchased a used car and new furniture.  Things were fine and he was easily making his payments on the house and car.  After a few months more credit card offers started coming in the mail, but this time they had bigger spending limits.  Thinking he learned the first time and could manage them better, he started collecting them again and soon had another five cards.

He had his own business by then and was making very good money.  Since he was paying all his bills on time and had open, active, good-standing credit cards, he went out and bought a new motorcycle, a truck and a house.  He stayed in the rental house and planned to rent out the house he owned.  It was not long after that business slowed down and the money was no longer there to pay the loans.  So, of course, he again maxed out his cards paying for other bills.  Things only got worse, and within a year Hunter lost both his cars and his motorcycle.  He also had to foreclose on his house and was evicted from the rental property.  Once again he had to move back home – this time with way more credit card debt, a foreclosure, a few repossessions and a tax lien on his credit report.

Now he spends his days working hard to try to pay off what he can and get back on track.  Even after almost ten years, Hunter did not learn how to mange his credit cards and always turned to them when things got tough.  Keep in mind that if you cannot manage your bills, there is no way you can manage credit cards.  Once you default on them and fall behind, they will become a burden and follow you for a very long time.  If you feel that a credit card will cause problems for you, don’t get one; if you do, never overextend yourself financially and have only one credit card for emergencies only.