Every Chapter 7 or Chapter 13 debtor must attend two credit counseling classes. The first, called the pre-bankruptcy credit counseling course, is required before you can file. Your certificate of completion is your ticket in to the bankruptcy process.
Once you have an active case, however, you must attend a second course called a financial management course, obtain a certificate of completion and have your lawyer file that certificate with the clerk of bankruptcy court.
This financial management course offers tips about how to set up a household budget and how to avoid financial mistakes that resulted in your need to file for bankruptcy in the first place.
If your lawyer does not file this financial management course certificate of completion you will not be eligible for a bankruptcy discharge. Instead, your case will be closed without discharge.
Why is a discharge order so important? It represents a formal order from the bankruptcy judge that all debts which can be eliminated or adjusted have been so modified. This order is binding on all state and federal courts and if a creditor attempts to collect on a discharged debt, you can sue that creditor for damages in a contempt proceeding.
Equally important, the discharge order serves as a formal notice to the world that your bankruptcy case is officially over and that a future creditor will not be surprised by a reopening of your bankruptcy file.
Mortgage lenders, in particular, do not count a “case closed without discharge” as the end of your bankruptcy case. As far as most mortgage lenders are concerned, a non-discharged bankruptcy case is still an open bankruptcy case.
Last week, I spoke to a gentleman who is dealing with this very problem.
This gentleman had filed a Chapter 7 back in 2010 with another lawyer. As instructed he attended a financial management course and obtained a certificate of completion which he forward to his lawyer.
Unfortunately his lawyer was in the midst of some major business problems. This particular lawyer had borrowed money to grow his practice but overextended himself and had to lay off most of his staff. The lawyer ended up filing his own bankruptcy and has since moved out of town.
The lawyer received but never filed his client’s financial management certificate. The case was closed without discharge.
Fast forward five years and the gentlemen has rebuilt his credit to the point where he is able to purchase a house. But there is a problem – no conventional mortgage lender will underwrite the loan until two years has passed since the issuance of the bankruptcy discharge (note that there are other mortgage problems that did not apply here which have a 1 year post-discharge requirement).
The gentleman hired me to reopen his case, file the certificate and get a discharge issued, which I did. The problem remains, however that the date on the discharge order is 2015. In this case, my new client is going to have to wait until 2017 before he qualifies for mortgage underwriting.
Needless to say, my client is not very happy with his prior lawyer but there is nothing he can do but wait.
The takeaway from all this is clear: if you file bankruptcy, do not wait to find and complete a financial management course, and ask your lawyer for confirmation in the form of a filing receipt that the course certificate was filed.
Note as well that there may be other pre-discharge filings you have to make – for example in Chapter 13 case you will need to file a certificate that all child support payments which have come due in your Chapter 13 case were made.
Within two to three weeks after your case closes, you should receive an discharge order from the judge. You should keep this discharge order as part of your permanent files because you may need to show it to creditors or other agencies in the future. If you misplace your order your lawyer can download and reprint a copy from the online PACER system.