Navigating Bankruptcy

Navigating Bankruptcy

Bankruptcy Counseling: What It Is, What to Expect

Paying Off Debt, Personal Finance

Bankruptcy Counseling: What It Is, What to Expect

Paying Off Debt, Personal Finance
bankruptcy-counseling-expect

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 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.”

Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email: spyles@nerdwallet.com.

Navigating Bankruptcy

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How to Rebuild Credit After Bankruptcy

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How to Rebuild Credit After Bankruptcy

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How to Rebuild Credit After Bankruptcy

A Chapter 7 bankruptcy gives you the relief of a clean financial slate — but also the worry that you’ll never have decent credit again.

If you were eligible to file Chapter 7, chances are your credit was in tatters. But that’s different from the common misconception that bankruptcy ruins your financial future forever.

The truth is you can begin to restore your credit right away.


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Although a bankruptcy will remain on your credit reports for 10 years, its impact will fade with time. You can help the process by offsetting the negative information on your credit report with something more positive.

Start with the basics

At this point, lenders would like to see that you have enough income to pay your current obligations, and have a little left over. A lighter debt burden makes you a more attractive borrower.

Also, lenders won’t have to worry that you’ll file for bankruptcy to get rid of any new debt; you won’t be able to receive another discharge of your debts for eight years.   

Here’s your first order of business: Create a budget to help you stay on top of your finances. The pre-discharge credit counseling you went through before finishing your bankruptcy should have provided information on budgeting, but if not, don’t hesitate to seek help from a credit counseling agency. All nonprofit credit counseling agencies offer free basic consumer help on topics such as budgeting.

Next, begin building an emergency fund. Research by the Urban Institute shows that having as little as $250 in savings for an unexpected expense can protect families from resorting to payday loans or running up credit cards, which can start a new debt spiral.

Plan your post-bankruptcy credit strategy

You might think you’re a pariah in the eyes of lenders and credit card issuers, but that’s not quite true. You’ll have to prove yourself, of course, but it can be done.

Although your goal — building a good credit score — is the same as that of someone starting from scratch, your situation is a little different. Your problem isn’t that creditors don’t know anything about you, but rather that they know a lot. 

First, assess your situation. You can do that by checking your free annual credit reports. Your credit scores are calculated using information in your credit reports, so any inaccurate negative information can make it even harder for you to dig out of debt. If you find errors, dispute them and get them corrected.

Of course, there will be negative information that is accurate. Your reports will show your bankruptcy for 10 years. Also, late payments and debts that go to collection remain on the reports until seven years after the delinquencies. A Chapter 7 filing wipes out debts, but it doesn’t wipe your credit reports clean.

Second, check your credit score. There are several ways to get a free credit score, from personal finance websites like NerdWallet and some credit card issuers. It’s smart to track your credit score month to month, and it’s crucial to look at the same score each time — otherwise, you’ll get a not-useful apples-to-oranges comparison. Pick one type of score to track and stick with it.

Cleaning up your credit reports and knowing which credit score will be seen by lenders helps you know which credit products to apply for.

Seek a product that suits your situation

Your pre-bankruptcy payment history will make you look like an extremely risky borrower to lenders. You can fix that problem by providing extra assurances that they won’t lose money by lending to you. Here are four ways to improve your financial profile. That will help you get credit and work on restoring your score:

Secured loan: This comes in two varieties, and most often is offered by credit unions or community banks. One kind of secured loan involves borrowing against money you already have on deposit. You won’t be able to access that money while you’re paying off your loan. The other kind can be made without cash upfront, though the money loaned to you is placed in a savings account and released to you only after you have made the necessary payments. In return, the financial institution agrees to send a report about your payment history to the credit bureaus.

Secured credit card: This kind of card is backed by a deposit you pay, and the credit limit typically is the amount you have on deposit. A secured card often has annual fees and may carry high interest rates, but you shouldn’t need it for the long term. It can be used to mend your credit until you become eligible for a better, unsecured card.

Be aware that you can be rejected for a secured card. Read the requirements carefully; you’ll want to be almost certain you can get approved before you apply for one, because each credit inquiry can cause a small, temporary drop in your score. This decline will be more than offset if you get a card, use it lightly, and pay the debt on time.

NerdWallet credit card expert Sean McQuay recommends applying for a secured card at a credit union or other local bank. “They tend to be much more lenient with credit history, and many will be happy to work with you to build your credit profile,” he said. “One big caveat, however: Before applying, make sure the bank or credit union reports credit activity to all three credit bureaus. Make sure your good credit behavior counts.”

Co-signed credit card or loan: This can help your score, but you need to have a friend or family member with good credit history who is willing to co-sign for you. It’s a big ask: A co-signer is risking his or her credit reputation for you, will be on the hook for the full amount if you don’t pay, and may face limits on personal borrowing because of the additional debt obligation. A co-signed card or loan can damage relationships if you don’t pay as agreed.

Authorized user status: If asking someone to co-sign is too much, you could instead ask to be an authorized user on that person’s credit card. But make sure the credit card will report payment activity by authorized users to the credit bureaus, or it won’t help build your score.

This route won’t lift a score by nearly as much as the other methods, because authorized users don’t have ultimate responsibility for repaying debt. (It is much more likely to help someone who has a “thin file” with little credit information in it than someone who has a file chock-full of negative information.) But this path won’t hurt, so you may want to pursue it.

Next steps

Once you get a lender to extend credit, be vigilant about paying on time. Keep your credit card balances low relative to card limits — less than 30% is typically advised, but less than 10% is even better.

You’re already seeking redemption, so you can’t put yourself in a position where you’re begging for forgiveness for a late payment or struggling to keep up with mounting credit balances.

When your recent history finally shows you are a good credit risk, your vigilance in restoring your credit reputation will pay off.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

This article was updated June 20, 2016. It was originally published Dec. 17, 2014.