Heading to Bankruptcy? Follow the Counseling Rules First

NEW YORK (MainStreet) -- Consumers may not realize it, but you can't enter into bankruptcy without a few preliminary steps, and if you don't take those steps, then the legal system likely won't let you take that step into bankruptcy.

Pre-bankruptcy counseling, for example, is mandatory - and you’ll need to clear some judicial hurdles when dealing with financial counseling.

If you are heading into bankruptcy, you’re certainly not alone. According to data from Epiq Systems and the American Bankruptcy Institute, the number of U.S. bankruptcies grew by 19% in February. The total number of bankruptcies for the month hit 104,418.

The number of strictly consumer bankruptcies jumped 20%, to 99,288 for the month.

As always, the creaking economy is the primary culprit for the surge in bankruptcies. “The stagnant housing sector and high unemployment continue to stress the cash flow of consumers and businesses,” noted ABI Executive Director Samuel J. Gerdano, in a March 6 statement. “As consumers and businesses work to shed tremendous debt loads, there are times when bankruptcy is the only shelter to provide financial relief.”

Adding more fuel to the fire is a rise in foreclosures. According to RealtyTrac, almost 207,000 homes were foreclosed upon in February, as mortgage lenders got busy after agreeing to a $25 billion settlement with state attorney generals that was initiated in large part because of the sloppy foreclosure documentation procedures from many banks and lenders.

If you are declaring bankruptcy, or are about to, you need to lay some groundwork first. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act made it mandatory for Americans heading into bankruptcy to take financial and credit counselingsessions.

According to the Chicago-based bankruptcy law firm Macey Bankruptcy Law, credit counseling must be completed within 180 days prior to a bankruptcy filing.

The firm notes in a research report that if a consumer doesn’t meet that 180 day requirement the chances of getting that bankruptcy approved is remote, at best.

Macey Law advises consumers going into bankruptcy have to get that financial counseling from an approved agency – one that has the stamp of approval from the U.S. Justice Department’s Trustee Program.

The good news is that consumers can complete a financial counseling session in under 90 minutes, and can do so over the phone, face-to-face, or even online. Plus, the counseling services are free of charge, if you can prove an” inability to pay” Macey Law says.

Veering into bankruptcy is a tough task. But you can come out of the experience with your debts organized, and with some time to get back on your financial feet again. If you are heading to bankruptcy court, get the financial counseling sessions out of  the way first, then start putting your life back together again.