Before filing Chapter 7 bankruptcy in New Mexico, it is a requirement for individuals to complete a credit counseling course.
Considering bankruptcy can already be a stressful decision, but entering into it prepared can help relieve some of that stress. So, here is an overview of how mandatory credit counseling works.
Counseling helps individuals understand their situation
The credit counseling class is meant to educate individuals about their financial circumstances and their options.
Individuals will typically take a credit counseling course either online or over the phone, as indicated by the “delivery method” on the list of approved credit counseling agencies. The course typically takes one to two hours, and a certificate will usually be received within 24 hours after completion of the course.
In general, there are three elements to the course. And these three steps help individuals to determine if filing bankruptcy is the right option for them. However, it helps to prepare them for their financial future after bankruptcy as well.
These three steps include:
1. Evaluating their past, current and future finances
Through credit counseling, debtors will have to review their finances. It is helpful to collect all financial records since the counseling will examine nearly every detail of a person’s finances, including:
- Earnings and net worth
- Credit card bills, statements and credit scores
- Necessary expenses, such as groceries and taxes
- Other expenses, such as entertainment costs
- Any outstanding loans, including mortgages
This is information that an attorney will also require to fill out bankruptcy paperwork for a debtor, so it should already have been gathered by the individual.
Calculating these finances together allows the agency to determine someone’s debt-to-income ratio. Falling behind on payments can feel overwhelming. And figuring this ratio can help individuals determine where they stand.
2. Assessing all options for debt relief available
Analyzing someone’s finances is also a critical step because it helps determine which options are viable for repaying the debt. That is why individuals must fulfill credit counseling before bankruptcy.
The agency might advise someone about alternative options to bankruptcy, including settling debts or continuing with credit counseling. Regardless of the options individuals choose, the counseling also helps people establish a strategy for managing their money to keep their debt under control.
3. Creating an effective budget
This is often the primary goal of credit counseling. The course helps individuals struggling with debt to establish a budget and money management skills.
Budgets are often very personal. Everyone’s budget looks different since they need to meet different needs. However, an average budget in credit counseling includes:
- How much someone makes
- How much income goes to the necessary expenses
- A plan for managing debt and new payments
- How much they have left to spend
The credit counseling course may help individuals tailor their budget to their needs.
Creating a budget can help individuals during and after bankruptcy protect their financial future. That is the objective of credit counseling, after all. It gives individuals the tools they need to help relieve their debt, as well as avoid debt in the future.