Declaring Chapter 7 or Chapter 13 bankruptcy is no small decision, but it may be your best debt relief option if you see no clear route to paying off what you owe within five years.
Bankruptcy is a long and sometimes confusing process; just filing can take months to complete. The federal government requires two sessions of credit counseling: pre-filing counseling to kick off the process and pre-discharge counseling before your debts are forgiven. These sessions will help you understand how bankruptcy works, its lasting effects and how to avoid financial risk in the future.
The counseling sessions don’t take long to complete, and they can be the most painless part of filing for bankruptcy. Here’s what to expect.
Pre-filing counseling
After finding the right attorney for your situation, pre-filing bankruptcy counseling is your first step toward getting the gears of the process turning. If you don’t go through pre-filing counseling before submitting your case to the court, it will be thrown out.
In addition to being an educational course to help you understand the advantages and disadvantages of going through bankruptcy, pre-filing counseling also presents alternatives such as debt management to help you determine whether bankruptcy is the best way to resolve your debt.
“We show consumers local resources they may not know are available,” says Joji Varghese, a credit counselor with Clearpoint Credit Counseling Solutions. “There are alternatives for them to get out of debt on their own. Many can learn how to cut their expenses and save a little bit to pay off their debts without filing for bankruptcy.”
Bankruptcy attorney Lawrence Szabo calls that unlikely, however: “In theory, it’s designed to see if maybe an alternative to bankruptcy could be considered, but that very rarely happens.”
When you finish the pre-filing session, you will receive a certificate of completion valid for 180 days. You'll need that certificate if you do decide to file for bankruptcy.
Pre-discharge counseling
Pre-discharge counseling, the last step before the court finalizes your bankruptcy and discharges your debts, offers valuable financial education to help you manage your finances in the future.
“It’s focused on income, expenses and strategies for how to help you save money,” Szabo says. “I’ve had a few of my clients over the years say they actually found it quite helpful.”
This class covers much of the same ground as the pre-filing session but with a focus on increasing your financial literacy. You’ll cover topics such as understanding your credit scores, managing a budget and avoiding financial risk.
“If a person is serious about getting out of debt, the pre-discharge course can give them information and tools to avoid getting into the same situation again,” Varghese says.
As with pre-filing counseling, you’ll receive a certificate upon completion. You'll need to have that certificate before the court will discharge your debts.
How you’ll do it
Pre-filing counseling and pre-discharge education are available only from nonprofit credit counseling agencies approved by the Department of Justice.
Look through the approved agencies and talk with a few credit counselors to find one you feel comfortable with. (Keep in mind you can switch to a different agency for the second session if you like.)
Don’t worry if you don’t find an approved agency near you; most pre-filing and pre-discharge sessions take place over the phone or online. Some agencies, like Clearpoint, do pre-discharge sessions only online.
Before going into either session, gather documents that outline your income, expenses and debt to expedite the process. Expect each session to take between 90 minutes and two hours.
What it costs
The average cost for pre-filing and pre-discharge courses is $25 to $50 each, depending on where and how you do the counseling.
Most of the bigger credit counseling agencies, such as ClearPoint and Money Management International, charge a flat rate of $50 per session. But some states cap the fee for pre-filing counseling at $20, and some agencies offer lower fees for online sessions. For instance, InCharge Bankruptcy Counseling charges $25 for pre-filing counseling online and $15 for its online pre-discharge course.
Many credit counseling agencies will waive the fees if they determine you can't pay given your household budget. Be sure to get any fees in writing before starting a pre-filing or pre-discharge session.
What happens next
These counseling sessions are just two steps on the journey of eliminating debt through bankruptcy. It’s not an easy or quick fix: Chapter 7 takes three to six months, and Chapter 13 takes three to five years.
If you use the tools provided in the counseling sessions, however, you can begin to erase its effects on your credit upon completing your Chapter 7 or Chapter 13 bankruptcy.
“After you take the second course and your bankruptcy is discharged, you can start rebuilding your credit,” NerdWallet columnist and financial advisor Liz Weston says. “The first step is to save up a little cash for an emergency fund, and then look into credit builder loans and secured cards.”
“If you manage these accounts responsibly, you should start to see your credit scores improving within a year or two,” Weston says. “The bankruptcy will continue to affect those scores for 10 years, but many people can get their scores up to ‘good’ levels within three to five years.”