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Bankruptcy And Credit Counselling

Recent months have seen one of the greatest economic crises recorded, with the consequent closure of business and rise in unemployment.

No matter who one decides to blame for the mess, the simple truth is that many of us borrowed far too much money with no logical thought to the future, somehow expecting economic growth, and particularly house prices, to continue beyond the already impossibly high levels at the turn of the century.

Many people therefore have now had the rug taken from under them, and find that they are in an impossible financial position that requires drastic action.

In 2005 the government introduced the Bankruptcy Abuse and Consumer Protection Act, the effect of which has made it much harder for individuals to file bankruptcy. This is not to say it can’t be done, but there are a number of processes that the debtor now has to go through.

One of the main reasons for the new regulations was to prevent fraud. What was happening was that some people and businesses were filing chapter 7 bankruptcy. Chapter 7 is basically where all the debtors assets are sold, (liquidated), and the proceeds distributed amongst their creditors in full and final settlement of any debt. Any shortfall was no longer the responsibility of the debtor. This was a great way to get rid of debt and start again, albeit with far fewer possessions.

However, some individuals and businesses would simply hide or give assets away to close friends or family, not disclose their full income details, and therefore be in a rather good financial position at discharge. They would have retained assets that should have been sold, and continue to enjoy a good income, as they had not declared the full extent of their income initially.

Under the Act, it is now compulsory to attended credit counselling. This is for many reasons, including investigating ones financial affairs to see if there are any alternatives to bankruptcy. To have someone shine some light into another person’s difficult financial affairs can often be of benefit, as the outsider brings a clear and less pressurised focus on the debtor’s situation.

However, one of the main reasons for the compulsory means test is to ensure that if a debtor can repay, even under a chapter 13 filing where a 3-5 year repayment plan is arranged, they do repay.

To this end, anyone attending credit counselling will be required to bring details of their assets, income, expenses and debts so that their financial position can be examined thoroughly, and the appropriate chapter filed under, thus ensuring maximum possible returns for their creditors.

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