This is the sixth post in a series describing UpRight’s recommendations to the ABI Commission on Consumer Bankruptcy. Start at the beginning.
The pre-petition bankruptcy counseling requirement was intended to provide debtors with useful information about alternatives to bankruptcy. The hope was that credit counseling would make debtors aware of options that would allow them to settle their debts outside of bankruptcy. However, very few prospective bankruptcy petitioners emerge from credit counseling with an alternative plan.
Section 502(k) of the U.S. Bankruptcy Code allows the Court to reduce a creditor’s claim by up to 20% upon a showing that the creditor unreasonably refused to negotiate a reasonable repayment schedule, if the debtor also proves that:
- the plan was proposed on the debtor’s behalf by a credit counseling agency as described in Section 111
- the offer was made at least 60 days prior to the date of the bankruptcy petition
- the plan provided for repayment of at least 60% of the debt
- the plan did not exceed the existing repayment period or some reasonable extension
- no part of the debt was otherwise non-dischargeable
In 2007, the Bankruptcy Court for the Northern District of Ohio said, “…based on those standards, the prospect of a debtor recovering such a penalty in any given case appears more illusory than practical or realistic…” (In re Hayes, 385 B.R. 644)
In fact, we have found no reported case granting relief under Section 502(k).
If debtors are to receive pre-bankruptcy counseling, they should be counseled about the bankruptcy process and the different types of bankruptcy, in order to make a fully informed decision. Consumer bankruptcy attorneys are–and should be–required to counsel debtors about these aspects of the bankruptcy system and about non-bankruptcy alternatives.
Given that requirement, we believe that pre-petition credit counseling is not really necessary for debtors represented by counsel. However, debtors who are not represented by an attorney or receiving information from another debt relief agency should demonstrate that they have been counseled regarding:
- their rights under Chapter 7 and Chapter 13
- the notices they will receive under Section 342
- the information a debt relief agency is required to provide under Section 527(a)(2)
- the information set forth in Section 527(b)
- information regarding the debtor’s responsibilities under Section 521, including related matters in Section 527(c)(1)-(3)
Amending the Bankruptcy Code to require pre-petition bankruptcy counseling only for unrepresented debtors, the process could be adapted to become meaningful and beneficial to debtors, rather than illusory and unduly burdensome.
Next Up: Promoting Uniformity of Consumer Bankruptcy Practice through FRBP 4002(b)
