Archives for November 2017

Satisfying the Debtor Education Requirement

You can’t complete a personal bankruptcy and receive a discharge of debts without meeting the so-called debtor education requirement.


The “Credit Counseling” and “Debtor Education” Requirements

If you are an “individual” filing a bankruptcy case you can’t file a bankruptcy case without first undergoing “credit counseling.” (An “individual” is a person, not a business entity.) This requires you to get “an individual or group briefing (including… by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in preforming a related budget analysis.” (See Section 109(h) of the U.S. Bankruptcy Code.) It’s easier than this might make it sound. You must do this during the 180 days before filing, and you can’t file without doing so. (See our very last blog post about “credit counseling.”)

Then after filing bankruptcy, you must also meet the “debtor education” requirement. This means completing “an instructional course concerning personal financial management.” If you don’t do this, the case will end without you getting the discharge (legal write-off) of your debts. This applies to both Chapter 7 (Section 727(a)(11))  and Chapter 13 (1328(g)) of the Bankruptcy Code.

Today’s blog post is about this requirement.

What IS “Debtor Education”?

It is a class “designed to assist debtors in understanding personal financial management.” It’s usually done online, but can also happen over the phone, or even in person.

The “nonprofit budget and credit counseling agencies” providing the class must be approved by the United States Trustee, based on certain “applicable standards.” (See Section 111(c)(2) of the Bankruptcy Code.) At the heart of these standards an agency must:

provide adequate counseling with respect to a client’s credit problems that includes an analysis of such client’s current financial condition, factors that caused such financial condition, and how such client can develop a plan to respond to the problems without incurring negative amortization of debt

Make Sure to Do “Debtor Education” on Time

You get a certificate of completion after completing “debtor education,” your proof that you did so. Tell your bankruptcy lawyer so that he or she can file this certificate at court. This must be done before your case is completed. Otherwise, if a certificate of completion isn’t in your file when your bankruptcy case is ready to be closed the judge won’t sign the usual order discharging your debts. Then your bankruptcy case ends without a discharge of your debts.

This is not good. Most likely your main goal in filing bankruptcy is to discharge your debts and get a financial fresh start. You certainly don’t want to go through all that effort and expense without reaching this goal.

There’s a Likely Solution But It’s Expensive and Risky

If you’re reading this after your case has closed without you meeting the “debtor education” requirement, there’s likely a solution.

You could still take the “debtor education” class—after your case is closed. At that point, your lawyer may be able to persuade the judge to reopen your case, accept your certificate of completion, enter the discharge order, and then again close your case. This would get you the discharge of debts and solve the problem.

But it’s much better to avoid this situation. For 3 good reasons:

  • These otherwise unnecessary steps would cost you hundreds of dollars more in “re-opening” filing fees and additional attorney fees.
  • While your case is closed without a discharge, all your creditors could take action to collect on their debts.
  • There’s some risk that a judge would not go along with this attempted solution.

So, take the “debtor education” course on time—preferably soon after filing your case—avoiding these unnecessary costs and risks.


Satisfying the Credit Counseling Requirement

The credit counseling requirement is not at all hard to meet. You have to do it before you can file a bankruptcy case, so get it over with.


You can’t file an individual bankruptcy case without first taking this one, relatively easy step—the so-called “credit counseling.” It’s probably helpful to consider it nothing more than a bureaucratic formality. It almost never serves as any kind of helpful “counseling.” But you definitely need to take of it and appropriately to avoid problems when you file bankruptcy.  

The Requirement

The part of the U.S. Bankruptcy Code titled “Who may be a debtor,” says you can’t file a bankruptcy unless you

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.

See Section 109(h) of the Bankruptcy Code.

This is easier than it sounds.

What’s Actually Required

Not much.  It’s actually a simple procedure you do on the internet, or by phone if you prefer. You simply provide some information about your debts, income, and expenses, and then are almost always told that your income is not sufficient to pay for your expenses.

The practical benefit of this “counseling” is that you get an emailed certificate saying that you’ve completed “credit counseling.” That certificate lets you file bankruptcy. You can’t without it. Your lawyer attaches it to your initial bankruptcy petition.

180 Days before Filing

The “counseling” session must take place “during the 180-day period” before filing bankruptcy. So be sure that you’re going to be filing bankruptcy within that length of time after you do it. Otherwise, if your bankruptcy filing is delayed you may have to do the counseling again closer to your filing date.

Usually people run into the opposite problem, putting it off too long. Be sure not to get into the position of needing to file bankruptcy quickly but not being able to. Get the credit counseling step out of the way as soon as you know that you’re filing soon.

Reason for this Requirement

The supposed reason for this requirement was to encourage people to consider options other than bankruptcy. Some say that its real purpose was to bureaucratically discourage people needing bankruptcy relief. In the end it does not seem to be an effective disincentive.  

For example, the United States Government Accountability Office has issued a report with the following practical conclusion:

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 providers of this service must first be approved by the U. S. Trustee. (That’s an agency which oversees certain aspects of the bankruptcy system.) You can find a list of the approved agencies for your area on the U.S. Trustee’s website. In the dropdown list click on your state. (Look for your local federal district if you state has more than one).

Frankly, this will lead you to a long and not very helpful list of approved providers. They vary widely in quality, convenience, and cost. So ask your bankruptcy lawyer which one he or she recommends, and for other helpful information about that particular provider.


Protecting Your Co-Signer Better through a Chapter 13 Bankruptcy

Chapter 13 protects your co-signer better through the special co-debtor stay. It has its own limits but provides the strongest protection.  


Two weeks ago we discussed how to protect yourself from both your co-signer AND the creditor owed the co-signed debt. 

Then last week was about protecting your co-signer in the limited ways that Chapter 7 can. It assumed that protecting your co-signer was a very high priority for you. You are willing to pay the co-signed debt once you discharged (wrote off) all your other debts.

The Limitations of Chapter 7

But as we just said Chapter 7 “straight bankruptcy” helps in only limited ways. Here are situations where it can’t help. If:

  • even after bankruptcy, you can’t afford to pay the co-signed creditor’s monthly payment
  • whether or not you can afford those payments, you’ve fallen behind and don’t have the money to catch up
  • the co-signed creditor has “accelerated” the debt—declared it to be all due at once, which you can’t pay all at once
  • the creditor has sued your co-signer, and already has or will soon have a judgment against him or her

In all these scenarios nothing stops the creditor from pursuing your co-signer.

Chapter 7 Protects You but Not Your Co-Signer

As soon as you and your bankruptcy lawyer file a Chapter 7 case, the creditor could no longer chase you. You’d be protected by the “automatic stay” against virtually all creditor collection actions. (See Section 362 of the U.S. Bankruptcy Code.)  And after your case would be completed a few months later that debt would be forever discharged. The creditor would have no further recourse against you. (See Section 727(b) of the Bankruptcy Code.)

Because of this the creditor would pursue your co-signer instead. The creditor may not even be willing to talk with you or accept your payments because it thinks it’s legally not supposed to.

The Special Chapter 13 Co-Debtor Stay Solution

If you instead file a Chapter 13 “adjustment of debts” case you can usually protect your co-signer from the creditor. This protection is enabled by the “co-debtor stay,” which is available only under Chapter 13.

The co-debtor stay specifically protects your co-signer—“any individual that is liable on [a consumer] debt with the debtor.” The “creditor may not act, or commence or continue any civil action [that is, lawsuit], to collect all or any part of a consumer debt of the debtor.” (See Section 1301 of the Bankruptcy Code.)

So the co-debtor stay stops an attempt by the creditor to collect the debt through the co-signer.

Limits to the Co-Debtor Stay

This may not be quite as good as it sounds right off.

First, the creditor can get around the co-debtor stay simply by filing a motion in the bankruptcy court saying that your Chapter 13 payment plan is not proposing to pay the debt in full. (Section 1301(c)(2).)

One way to prevent this is for your lawyer to structure your payment plan to pay that debt in full.  If your original plan did not do this, amend your plan to pay that debt in full after the creditor’s motion. Bankruptcy judges in most parts of the country will allow you to favor your co-signed debt in this way.

Second, there’s a problem even if a creditor takes no action when you’re not paying the co-signed debt in full. The co-debtor stay expires when your Chapter 13 case is completed. To whatever extent you didn’t pay off the debt by that time, the creditor can then pursue your co-signer. This includes any accumulated interest, late fees, etc.

The only way to prevent this is to make sure that you pay the co-signed debt in full during your Chapter 13 case. You’ll usually have up to 5 years of protected time to do so.

Third, the creditor can pursue your co-debtor if the debt benefitted the co-debtor instead of you. After asking permission from the court the creditor can pursue the co-signer if it “received the consideration” for the debt. (See Section 1301(c)(1).) That is, you can’t protect a co-signer if YOU actually co-signed the debt tor the CO-SIGNER’S benefit.

Exceptions to the Co-Debtor Stay

The co-debtor stay does not apply to and help with:

  • non-consumer (business) debts
  • income tax debts (with spouses or business co-obligors)
  • debts entered into by your co-signer “in the ordinary course of [his or her] business”


Notwithstanding these conditions and exceptions, Chapter 13’s co-debtor stay can be a remarkable and effective tool for protecting your co-signer.


Protecting Your Co-Signer in a Chapter 7 Bankruptcy

Chapter 7 bankruptcy helps you protect your co-signer, mostly by discharging your other debts so that you can pay the co-signed one.


Last week we wrote about protecting yourself from both your co-signer and from the creditor owed the co-signed debt. 

If you decide to file bankruptcy you want to discharge (legally write off) all the debts that you can.  Then you can—if you want and are able to—pay any obligation you feel morally compelled to. Especially if you’re no longer friendly with your co-signer you want to end any legal liability you may have to him or her. And you want to end the legal liability you have to the creditor itself. So you legally discharge those two obligations to protect yourself.

But now let’s focus on protecting the co-signer. Let’s assume that you feel very strongly about doing all you realistically can do for that person. You want to do what you can to prevent the creditor from coming after him or her. Or if your co-signer has already paid part or all of the debt, you’d like to make your co-signer whole. How could bankruptcy help in this?

Chapter 7 and Chapter 13 each have advantages and disadvantages in protecting your co-signer. We start today with Chapter 7.

How Chapter 7 Helps

Chapter 7 “straight bankruptcy” helps mostly indirectly. Filing this type of bankruptcy would discharge all or most of your other debts. That should make it at least somewhat easier to pay the co-signed debt if you wanted to.

Be sure to list both your original creditor and its co-signer on your bankruptcy schedules. Do so both because you are required by law to list all creditors and it’s prudent to cover those distinct obligations. You owe the creditor based on your debt agreement. You likely owe your co-signer based on whatever agreement you have with him or her, oral or otherwise. Both obligations would very likely be discharged in your Chapter 7 case. (This assumes that there is no fraud-based objection by either). So you would very likely have no legal obligation to pay either of them.

Protecting Your Co-Signer through Chapter 7

The discharge in Chapter 7 happens quite quickly—usually within about four months from filing. So then IF and WHEN you wanted to, you could start making the monthly payments to the co-signed creditor. If your co-signer had started making these payments, you could informally consent to start making them again.

Your legal obligation to pay this would by this time have been discharged in bankruptcy. You certainly don’t want to create a new legal commitment. So you should make clear that you are paying strictly voluntarily.

If your co-signer has already paid the entire debt you could similarly consent to reimburse him or her.

The same applies if the co-signer has paid part of the debt. You could arrange to make the remaining payments directly to the creditor, and then work on reimbursing the co-signer through payments afterwards—or whenever you wanted.

Again, in all situations make clear that whatever you choose to pay is strictly voluntary.

No Legal Constraint on Paying This Debt

One advantage to Chapter 7 regarding a co-signed debt is the flexibility it gives you to pay the debt. As Section 524(f) of the U.S. Bankruptcy Code makes clear, nothing “prevents a debtor from voluntarily repaying any debt.”

Because Chapter 7 is such a short procedure there is nothing preventing you from paying a discharged debt. In contrast, a Chapter 13 case usually last 3 to 5 years, during which time you are in a formal payment plan. During that period of time you can’t favor any creditors except as the law specifically allows you to do.

Nevertheless, Chapter 13 does give you other advantages with co-signed debts, which we’ll get into next week.