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Missed Opportunity: Education Courses Not Targeted to Bankruptcy Filers

posted by John Rao

While many have appropriately questioned the value of the pre-filing bankruptcy counseling mandated by BAPCPA, including the GAO in its report to Congress, few have passed judgment on the post-filing debtor education courses.  For those not familiar with these requirements, an individual filing bankruptcy must receive a briefing from an approved credit counseling agency within 180 days before the bankruptcy case is filed and must also take an approved education course after the case is filed.  The education courses, it seems, have been considered helpful to consumer debtors, at least as much as any two-hour course can be expected to improve a consumer’s financial well-being.  But could these courses be designed to provide a more meaningful educational experience for their intended audience?

With my colleagues Deanne Loonin and Mallory SoRelle at NCLC, we reviewed a number of these bankruptcy debtor education courses.  We also looked at the pre-filing briefings in our report, and considered accessibility and affordability issues.  But I quickly became frustrated with the education courses.  I had wrongly assumed that in developing the courses, providers would seek input from trustees, bankruptcy attorneys, and law professors on how the courses should be tailored to consumers who would be emerging from bankruptcy with their discharge and opportunity for a fresh start.  Instead what we found were mostly generic financial literacy courses.  To the extent any of these existing courses were retooled for bankruptcy purposes, it was simply to make them fit the organizational structure required by the United States Trustee’s office in its Interim Final Rule.   

There are unique concerns for bankruptcy filers that, with a few exceptions, are generally ignored in the courses.  For example, not a single course we reviewed warns consumers that there may be a problem with how discharged debts are listed on their credit report after bankruptcy.  All debts discharged in the bankruptcy case should show a zero balance and be noted as having been included in the bankruptcy.  See Fed. Trade Comm’n, Official Staff Commentary § 607, item 6.  Yet a common problem for consumer debtors is that credit reports are not updated after bankruptcy to change the reporting of a discharged debt from being listed as “charged off” or showing a balance owed to being listed as “included in bankruptcy” and having zero balance owed.  It has been suggested that nearly two thirds of credits reports involving debts discharged through chapter 7 bankruptcy proceedings contain these types of errors.  See Acosta v. Trans Union, LLC, 240 F.R.D. 564 (C.D.Cal. 2007).

The failure to update this information can have a significant negative impact on a consumer’s credit score and will undermine the consumer’s ability to obtain a fresh financial start.  While general information about how to check credit reports is provided in the education courses, the agencies should discuss the importance of checking credit reports shortly after the bankruptcy discharge is received to ensure that debts discharged in bankruptcy are correctly reported and not listed as having a balance owed, and to file disputes with credit reporting agencies if the information is not correct.   

Only a few courses specifically warned consumers that they would be likely targets for offers of high rate credit coming out of bankruptcy.  (This may seem counterintuitive to some, but debtors who have wiped out their unsecured debt in chapter 7 and are barred from refiling for an 8 year period are seen as good targets for credit offers).  Instead, the majority of courses gave general information about some high cost credit options to avoid.  Much of this advice was helpful, but even just a few sentences acknowledging that the individual taking the course had just filed bankruptcy would make the material much more relevant.

None of the courses discuss the significance of the bankruptcy discharge and concerns about creditor attempts to collect on discharged debt.  One course suggests that if consumers have a budget surplus they should first pay off credit card debt, which should be quite confusing for debtors who will be receiving a discharge of this unsecured debt in a few weeks afer taking the course.  For debts reaffirmed by the debtor, no information is provided about the need to maintain payments and the consequences of default.  While agencies cannot provide specific legal advice on these topics, general information about the discharge and its enforceability would be extremely helpful for debtors who have filed bankruptcy without an attorney.  This information could be provided by the U.S. Trustee's program.

I had also expected providers to have two courses: one for chapter 7 debtors and another for those in chapter 13.  After all, before BAPCPA several chapter 13 trustees had developed an education program for chapter 13 debtors, and with the support of the NACTT, created the Trustees' Education Network.  A trustee in San Antonio who helped develop the TEN program claims that it has resulted in improved plan completion and a reduction in repeat filings.  Importantly, in addition to general financial literacy topics, the course curriculum includes topics on chapter 13 case administration.  And it is provided at no cost to debtors. 

Of the courses we reviewed, none were tailored to the concerns of chapter 13 debtors.  All the programs include a discussion on budget development, but not one even bothered to mention that debtors’ budgets for the next three to five years should be consistent with their bankruptcy schedules and confirmed plans.  There was no discussion of debtors’ responsibilities in chapter 13, such as maintaining trustee and mortgage payments and notifying their attorney or trustee about changed circumstances during the plan.  Given the common problems with mortgage servicing which have caused some chapter 13 cases to fail, you might expect some discussion about the need to monitor notices from servicers (or lack thereof) about escrow and ARM changes, and unauthorized fees and costs.  While education programs certainly have their limitations, a course which reinforces what debtors have been told by their attorneys, or may be hearing for the first time if unrepresented, can only be a positive step towards the goal of improved plan completion.   

Section 105 of BAPCPA (Pub. L. No. 109-8 (2005)) requires the Executive Office for the United States Trustees to establish and study a pilot education program in six judicial districts.  The final report evaluating the program should be released soon.  Hopefully, those participating in this study have considered whether the education courses should be targeted to bankruptcy filers.   

Comments

Very interesting. I hope you shared your results with the TEN program (with which I am quite familiar), as I am sure they would be interested in improving it.

We have included since 1989 the effect (or lack thereof) of the bankruptcy discharge on debtors' credit reports as part of our debtor education. The TEN course does a pretty fair job of discussing credit reports and how to correct them. Most trustees' own courses enhance the TEN materials with specific information on how to read credit reports and why 'charge off' is a very bad thing.

In Seattle, our local pro bono group, formed and run mostly by bankruptcy lawyers and professionals, offers a Personal Financial Management course in person and on line. We will review your post and make sure we are doing these things, but I know that we talk about post-bankruptcy use of credit and other impacts of bankruptcy. Our course is called Innovo, and it is offered by Consumer Education and Training (CENTS). It is approved nationwide. We appreciate referrals to our internet course from the bankrutpcy community.

John:

Bravo for an excellent report and for raising this important issue (the the missed opportunities that have resulted). I hope that it will be listened to.

Brett Weiss
brett@BankruptcyLawMaryland.com
www.BankruptcyLawMaryland.com

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