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New bankruptcy law requires credit counseling

The road to bankruptcy now runs through consumer credit counseling agencies.

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Provisions in the new bankruptcy law mandate credit counseling before a bankruptcy can be filed and a personal financial management seminar before a bankruptcy is complete. The law went into effect Oct. 17.

There is no free lunch -- most consumers will have to pay at least a nominal fee for both of these classes, adding to the financial burden of a bankruptcy filing. In fact, the entire process is about to get a lot more expensive and complex as a result of the new law. Known as Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it was passed by Congress in March and signed into law by President Bush in April.

Its passage set off a mad scramble, as federal agencies, courts, attorneys and credit counseling agencies all had to deal with a new set of rules. The new law restricts the ability of debtors to wipe out their debts under Chapter 7, to file repeated bankruptcy petitions and to select a more favorable jurisdiction for bankruptcy filings.

Consumer advocates say the law imposes too many burdens on consumers overwhelmed by debt. Travis Plunkett, legislative director of the Consumer Federation of America, or CFA, notes that there are two critical issues in the credit counseling and personal financial management provisions: whether consumers can find a reputable agency that will actually help them deal with their debts and whether the timing is right for them to benefit from such help.

"If most people can't benefit, then this will be an expensive barrier to both getting into, and emerging from, bankruptcy," he says.

"The law is designed to prevent debtors from using the system as a way to avoid their creditors," says Howard Ehrenberg, an attorney with SulmeyerKupetz in Los Angeles, and a member of the Chapter 7 Bankruptcy Panel of Trustees. However, it will take time for trends to emerge in how the law is actually interpreted by judges, he says.

Credit counseling briefing
One of the most significant changes is that under the new law, consumers who want to file for bankruptcy must complete a credit counseling briefing, designed to inform them of their options in dealing with their debts, six months prior to filing. The course must be at least 90 minutes long and can't cost more than $50. Accredited agencies can't turn anyone away based on their ability to pay.

The briefing can be provided through one-on-one, in-person counseling; group classes or over the phone or Internet. The U.S. Trustee Program of the Department of Justice, which administers various aspects of the new bankruptcy law, must approve the curriculum.

Credit counseling agencies rushed to get on the government's approved list, but few made it by the time the law went into effect. If you want an in-person counseling session, you're in for quite a drive.

As of Oct. 17, the government's list of approved vendors included only a handful. Someone in Albuquerque, N.M., for example, would have to drive 226 miles to El Paso, Texas, to get an in-person interview. A Miamian would have to drive 650 miles to Atlanta for a similar one-on-one session. That leaves telephone or Internet classes as the only real options for most people.

Next: Will this credit counseling really help consumers?
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