Featured Article from Lawyers USA:
Debtors and lawyers struggle with credit counseling
By Correy E. Stephenson Staff writer
Even before the Bankruptcy Abuse Prevention and Consumer Protection Act went into
effect in October 2005, attorneys decried its new requirements.
Recently, one of the Act's mandates - that all individual debtors receive pre-petition
credit counseling from an approved agency - has faced renewed attention as the
agencies grapple with some bad publicity.
Just months after the IRS revoked the tax-exempt status of 41 of the nation's largest
counseling agencies, a Texas bankruptcy judge attended a Q-and-A where he heard
the chief executive officer of an approved agency declare that his company didn't
employ former bankruptcy filers - a violation of the Bankruptcy Code. [See
accompanying story for more information.]
While the agencies struggle with their public image, lawyers are struggling with the Act's
"Whenever the law changes, uncertainty exists, but with [the Act], the incredibly poor
drafting and level of complexity that Congress tried to regulate makes the confusion
even more extreme," said University of Illinois College of Law professor Robert Lawless.
The Act imposes mandatory pre-petition credit counseling upon all potential debtors "to
try to get people to think about alternatives to filing for bankruptcy, to understand the
implications and consequences of filing," explained bankruptcy attorney Steve
Jakubowski, a partner at the Coleman Law Firm in Chicago who runs a blog at http:
But the reality has been quite different.
Pre-petition credit counseling is "just another hurdle - a way to impose more costs and
more paperwork and more time and more hassle before a consumer can get to
bankruptcy court," Lawless complained.
Jakubowski agreed. "The counseling requirement has created a lot of questions and
litigation, and harmed a lot of debtors," he said.
Under the Act, debtors must pay for and undergo credit counseling within 180 days
before filing for bankruptcy. The credit counseling requirement may be waived for 30 to
45 days if the debtor can prove that there were "exigent circumstances" or that an
approved counseling agency refused to assist him within five days of his request for
The counseling requirement has been interpreted broadly, covering everyone from
family farmers who file under Chapter 12 to incarcerated prisoners to professionals who
file as individuals. The counseling session costs approximately $50 and can be
performed in-person, on the phone or over the Internet.
In October 2006, approximately one year after the new requirements went into effect,
the National Federation for Credit Counseling reported that face-to-face counseling
accounted for just 15 percent of the 563,494 pre-petition filing sessions conducted. The
average time for sessions was about two and half hours, the NFCC reported, and fewer
than 4 percent of those who received counseling chose not to file for bankruptcy.
O. Max Gardner III, a bankruptcy attorney in Shelby, N.C., said the new requirement
"hasn't produced any tangible benefit for debtors. It's just another thing they have to do -
and pay for - in order to qualify for bankruptcy."
If the counseling "did some substantive good, I could see the justification for it," Gardner
added. "But when people are at the point where they are going to lose their home in a
few days at a foreclosure sale, what is the benefit of credit counseling to that person?"
The legal issues
Given the general antipathy towards the requirement, Jakubowski said the fact that it
has spawned so much litigation is "incredibly frustrating." Here are the main issues
courts have been struggling with:
Most credit counseling agencies offer services in both English and Spanish, and the
Executive Office of the U.S. Trustee has a search mechanism on its website
(http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm) that enables debtors to
search for services by language. But one bankruptcy judge has waived the credit
counseling requirement where no local agency could speak Creole, the debtor's
language, and the debtor couldn't afford a translator. (In re Petit-Louis, 338 B.R. 132
Absent a client "engaged in warfare with Al Qaeda or in Fallujuah," attorneys know
better than to file a motion seeking an exception to the credit counseling requirement
because of exigent circumstances, Gardner said.
In the immediate wake of the law's enactment, debtors tried several avenues to seek an
exemption for "exigent circumstances," the only stated exception, which isn't defined in
the statute. But courts have held fairly uniformly that exigent circumstances did not
include financial problems - i.e., imminent home foreclosure proceedings or car
repossession. Decisions have come from bankruptcy courts in Iowa, Minnesota,
Missouri and Texas, as well as from the 8th Circuit Bankruptcy Appellate Panel.
The U.S. Trustee's Office did make one notable exception: debtors filing in the Southern
District of Mississippi and all Louisiana districts in the wake of Hurricane Katrina
received a waiver of the pre-petition counseling requirement (although the waiver did
not apply to hurricane victims filing in other judicial districts).
Filed without counseling.
Courts are grappling with what to do with a debtor who has already filed a petition but
failed to get the requisite counseling, and the ramifications for debtors are serious.
"If the petition is dismissed, meaning it existed as a first case and the debtor must re-
file, that person now has to pay another filing fee, and once he re-files, the serial filer
section is triggered," explained Lawless. As a serial filer, the automatic stay isn't quite
as automatic - it's lifted after 30 days.
Jakubowski noted a recent decision where a bankruptcy judge ruled that because
neither of the debtors, a married couple, had received counseling prior to filing, the
automatic stay never attached and subsequent foreclosure proceedings on their home
were valid. (In re Jackson, No. 06-36789 (S.D. Texas 2007).
Other bankruptcy courts in Florida and Indiana have similarly held that because the
debtor is ineligible to file, no petition and no case existed, meaning the automatic stay
Some bankruptcy courts in Colorado, Georgia, New York, Pennsylvania and elsewhere
in Texas have chosen to strike the ineligible debtor's petition, rather than dismissing it.
This line of cases results in the application of the stay based on a distinction between
the filing of a petition and the filing of a case.
A minority of bankruptcy courts - in Indiana, Maryland and the District of Columbia -
have held that an ineligible debtor should still receive the protections of the automatic
stay, although no case is commenced.
When to get counseling.
The Act requires that pre-petition counseling occur "during the 180-day period
preceding the date of filing of the petition." (11 U.S.C. Sect. 109(h)(1).) But some
debtors have pushed the envelope, filing their petition just a few days after receiving
their certificate, or, in some cases, the same day they receive counseling.
Bankruptcy courts are split on how to handle the situation. Some cases, such as In re
Moore, No. 06 50573 (E.D.Tenn. 2006), have allowed same-day counseling, as have
courts in Arkansas, Connecticut, Maryland and Wisconsin. But another Tennessee
bankruptcy court and one in the District of Columbia have required at least a day
between counseling and filing, and a South Carolina court has held that counseling
must occur at least five days prior to the filing of a petition. (In re Dansby, 340 B.R. 564
The agencies themselves.
Jakubowski noted that while credit counseling agencies are operated as non-profit
ventures, the new requirements of the Act have resulted in a serious infusion of cash.
At $50 per session for more than 500,000 debtors, the industry received about $40
million last year just for pre-petition counseling, he estimated.
It's no wonder the IRS recently revoked the tax-exempt status of 41 agencies after an
audit revealed that they "offered little or no counseling or education and appeared to be
primarily motivated by profit," according to an IRS statement.
And sometimes the agencies haven't even earned their fee - in one Connecticut case, a
debtor contacted an approved counseling agency only to receive the wrong services.
Luckily for the debtor, despite the error, the bankruptcy judge determined that she was
still eligible to file her bankruptcy petition. (In re Kernan, No. 06-50111 (D.Conn. 2007).)
Questions or comments can be directed to the writer at:
Texas bankruptcy judge takes on counseling agency
In January, Marvin Isgur, a U.S. Bankruptcy Court judge in the Southern District of
Texas, attended a meeting of the Houston Association of Debtors' Attorneys.
Ivan Hand spoke at the meeting. Hand is the CEO of Houston-based Money
Management International, one of the nation's largest credit counseling agencies, with
over 140 locations in 22 states.
According to an order requesting a status conference filed by Judge Isgur, during a
question-and-answer period with the audience Hand stated that MMI had a policy of not
hiring any credit counselor who had previously been in bankruptcy.
Since such a policy would be a clear violation of Sect. 525 of the Bankruptcy Code - "no
private employer may … discriminate with respect to employment against an individual
who is or has been a debtor under this title … solely because such debtor or bankrupt"
has been a debtor - Judge Isgur requested that the U.S. trustee investigate.
Under Sect. 111(b) of the Code, credit counseling agencies can only be approved to
provide their services if the U.S. trustee reviews the agency and finds it meets the
statute's qualifications, including providing counselors "who have adequate experience."
(Sect. 111(c)(2)(F).) Judge Isgur noted in his request that the U.S. trustee might not
have inquired about the company's employment policies during the initial review.
MMI quickly filed an affidavit stating that Hand had misunderstood the question and that
the company had no such employment policy.
At a March 1 status conference, Judge Isgur did not take any action with regard to
MMI's continued status as an approved credit counseling agency, but did ask for further
investigation by the U.S. trustee as to whether the company had previously and would
continue to hire former bankruptcy filers.
A further status conference is scheduled for March 30.
In a statement to Lawyers USA, MMI spokesperson Clint Woods said there was a
"misunderstanding" about the company's hiring practices.
"We believe this is a non-issue and are certain this will be cleared up shortly," he said.
- By Correy E. Stephenson