Before a person can file bankruptcy they must take an approved credit counseling class and their attorney must file a Certificate proving the class was taken with the court.  The idea is to make sure that consumers are being educated about alternatives to bankruptcy, and when this new requirement was introduced in 2005 there was hope that such a class would significantly decrease the number  of bankruptcy cases being filed each year in the United Sates.

Well, it’s been more than 12 years since these classes have been required, and I have yet to meet a single person who chose not to file bankruptcy because of it. I suppose there probably is a person out there somewhere who was persuaded to avoid bankruptcy, but I can’t name a single person in the thousands of people I have met since 2005 that actually decided to not file bankruptcy because of that class.

Nevertheless, I support the concept of educating clients of each available debt solution. In fact, that is pretty much we do on the initial meeting with new clients.  I’m not here to “sell” anybody a bankruptcy case. My job is to identify possible debt solutions and then to help the client select the appropriate course of action. Ironically, the better I explain how non-bankruptcy alternatives work and how much each alternative costs, the more likely it is that a client will choose to file bankruptcy.

But I have to wonder, what would it be like if those who wanted to enroll in a credit counseling repayment plan had to speak to a bankruptcy attorney first?

I wish Jim and Francine Bostick would have spoken to me before they enrolled in a debt management plan in 2010. They owed $120,000 of credit card obligations at the time.  Jim, age 67, was in the early stages of dementia.  Jim and his wife, Francine, age 57, were persuaded by Housing and Credit Counseling Inc. of Topeka, KS, to enter into a 5-year repayment plan.  Instead of spending time with her husband in his last years of life, Francine took on a second job to make ends meet. When they completed their $2,496 monthly payment plan, the National Foundation of Credit Counseling sent out a press release touting the wonderful job done by their counselors. Not everyone thought this was such a wonderful result. See NFCC Celebrates Utter Stupidity and Puts Older Dementia Patient in Debt Management Plan.

Financial writer Liz Weston has criticized the credit counseling industry for not being forthcoming about the failure rate of credit counseling programs and for failing to point out more feasible debt solutions, like filing bankruptcy.  See Do Debt Management Plans Work?

Yet there’s one change needed that isn’t coming: Borrowers need to be told that bankruptcy could be a faster, cheaper solution.”  Liz Weston.

So what would I have advised Jim and Francine?

  • I would have closely examined a list of all their property to see if any of it would be at risk in a bankruptcy case.
  • I would have reviewed their current and past income to see if they qualified for Chapter 7 relief and, if that income was too high to qualify for Chapter 7, I would have assessed what they would have to repay each month in a Chapter 13 case.
  • I would have looked at debt settlement options and looked for possible assets they could sell to offer creditors without making monthly payments or entering bankruptcy.
  • I would have examined their lifestyle to see if they could downsize their home or sell of unnecessary assets to settle or pay the debts.
  • If their income was very high I may have recommend they look at a credit counseling repayment program, but since they had to take on 2nd jobs I doubt that was the case.
  • I would have considered doing nothing at all.  Elderly debtors living on Social Security income who own no real estate are often best off doing nothing at all.  Social Security cannot be garnished so if they could endure the collection calls and collection letters, senior debtors are often best off doing nothing at all.

But in the end, I am sure I would have recommend that they strongly consider the bankruptcy option and spend more time focusing on Jim’s health.

You see, my job is to help clients chose their optimal debt solution.  I’m not here to sell bankruptcy.

I’m fine if debt settlement was their preferred option since we handle those matters as well.  I frequently advise clients to try credit counseling programs when I think a bankruptcy will do more harm than good. I even encourage clients to manage their own debt reduction plans and to empower themselves by learning about the Dave Ramsey “debt snowball” approach.  It’s all good.  All debt solutions have their place, but when you sit down with a debt professional you should receive an unbiased opinion. That’s what it means to be a professional–to put the client’s needs first.

If credit counseling clients had to see me before they started a debt repayment program, I’m guess half would opt not to start the program.  Given that 50% to 75% of all credit counseling repayment programs fail, it appears that credit counselors are pushing clients into programs to make the agency money regardless if that is their client’s best option.

If you are trying to figure out how to get out of debt, look at all your options.  Get the best advice from the most professional folks in Nebraska.  Consider these options.


Image courtesy of Flickr and Rachel Kramer