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The Thorne-Porter Financial Education Study

posted by Jean Braucher

Last week, a short item was posted on a bankruptcy listserv about the excellent new paper by Deborah Thorne and Katherine Porter, Debtors’ Assessments of Bankruptcy Financial Education, available on ssrn.com.  Despite the insights of the paper about the wisdom (or lack thereof) of the requirement of financial management education in bankruptcy and about how to improve the education as long as it remains a condition for bankruptcy discharge, the listserv item (predictably) unleashed a lot of venting by consumer bankruptcy attorneys.  I share their pain, but I still feel strongly that the paper is extremely valuable (a dream from a researcher’s point of view, for how much light it sheds).

From a down-in-the-trenches practitioner point of view, it is a very big headache that individual debtors in bankruptcy must take a financial management course and file a certificate of completion to get a discharge.  Lawyers have to chase after their clients to make sure they take the course and then get the certificate filed.  There have been too many case closings without a discharge for failure to take the course or file the certificate.  For a sense of the burden on debtors’ attorneys, see In re Storey, 2010 WL 2164428 (Bkrtcy. D. Col. 2010).  Storey’s case was closed without a discharge for failure to file a certification that he had completed a financial management course (even though he had done so, after much foot-dragging, by the time of closing).  The court refused to let him reopen the case to get a discharge without paying a $260 reopening fee.  The court also ordered the debtor’s lawyer to show cause why he should not be required to disgorge $260 of his fee as attorney unless the lawyer paid the reopening fee for his client.  The burden of making sure that clients punch the “education” ticket for a discharge is one of many reasons the cost of consumer bankruptcy has gone up.  And one can’t help suspect that the requirement of financial management education was put in place precisely to create a hurdle that would increase the cost of access to a bankruptcy discharge.

But if we are stuck with this requirement, it is worth studying how good a job providers are doing and how they might do better.  The course need only last two hours, so we shouldn’t expect much impact, but debtors typically have to pay for the course (about $50) and they should get some value for their money.  Here’s where the importance of the Thorne-Porter study is obvious.  One of their findings is that debtors who have taken a course are much less optimistic that such education could have avoided the need for their bankruptcies than debtors who didn’t take a course.  Thorne and Porter compared survey responses of 2001 bankruptcy debtors (who didn’t take a course) and 2007 debtors (who did, because of the change in the law in 2005 to require education).  Among the 2001 debtors, 45.5 percent said a debt management course would not have helped them avoid bankruptcy, but among the 2007 debtors, who actually took a course, this figure rose to 66.7 percent.  These findings raise various questions:  Is the education provided useful?  Could financial education prevent many bankruptcies?  A “no” answer to both questions would be consistent with the Thorne-Porter data.  Rather, it may be that, as much research has suggested, bankruptcy is caused by structural elements of our economy and culture, including lack of job security, family breakup, illness combined with gaps in health insurance, and a tendency of families to carry high levels of debt that are just manageable in good times but not after income and expense shocks occur.

There are at least two other significant findings by Thorne and Porter.  One is that enthusiasm for debtor education in bankruptcy is higher among those with less education, minorities, the young and old, and those who report unfamiliarity with their family finances.  One size does not fit all—what a surprise, but useful to have it confirmed!  Thorne and Porter note that this finding suggests the need for more options for the debtor education requirement, with some targeted programs for different segments of the bankruptcy population.  This is an excellent idea, and one that the market might respond to.  If you are an entrepreneur who is in bankruptcy because you signed personal guarantees for your now-defunnct real estate development business in Las Vegas, you need to learn about the importance of having a generous ERISA-qualified pension and a nice home in Texas or Florida (unlimited homestead exemption states) before you launch your next business.  On the other hand, if you are a low wage worker, you probably need to hear that you may get subprime credit offers right after discharge and you should reject them and also be very careful to have a frugal budget and not take on any high-cost credit for purposes of immediate consumption, while saving for inevitable future financial shocks.  A differentiated market in bankruptcy financial education should be possible without increased cost to debtors.

Yet another finding of Thorne and Porter is that debtors are a lot more optimistic about the usefulness of financial education to help them avoid financial problems in the future than they are about whether education in the past could have helped them avoid bankruptcy.  A behavioral economist is needed here.  Is this some sort of debtor’s optimism at work?  Does this optimism have anything to do with how debtors are likely to behave in the future?  We know from prior research (Norberg and Velkey) that half or more of chapter 13 debtors use bankruptcy more than once.  For debtors who file more than once, are they typically optimistic after the first case that they could avoid financial problems in the future?  Thorne and Porter’s study calls for much more follow-on research, a sign of a productive line of inquiry.

A decade ago, as part of a study I was doing of impact of financial education on completion of a chapter 13 plan  (result: none found; see 9 Am. Bankr. Inst. L. Rev. 557 (2001)), I sat through the free debtor education programs being offered by chapter 13 trustees in several cities, such as Forth Worth and San Antonio, Texas.  I thought the education seemed pitched at a more upscale population than most of the folks sitting beside me.  Then I saw the evaluation forms filled out by the debtors.  They were very positive.  My hunch at the time was that the debtors appreciated being treated respectfully and as capable of doing better in the future.  And it is a good thing to treat debtors in bankruptcy that way.  They need to have a sense of hope.  But I suspected that the program evaluations filled out by these debtors had more to do with emotional relief at being treated well than with the usefulness of the information and its ability to allow them to avoid debt problems in the future.  If the reasons for overindebtedness are structural and cultural, I don’t think we should expect a two-hour course to combat these forces effectively.  Thorne and Porter seem a little more optimistic on that score than I am, but they note all the reasons for caution.


"debtors are a lot more optimistic about the usefulness of financial education to help them avoid financial problems in the future than they are about whether education in the past could have helped them avoid bankruptcy. A behavioral economist is needed here. Is this some sort of debtor’s optimism at work? Does this optimism have anything to do with how debtors are likely to behave in the future?"

This is consistent with "nudge" type of ideas and some of the changes supposedly the CFPA is supposed to be pursuing. I.e., if I draw someone's attention to the task of repaying debt, it affects their judgment about the benefit of incurring debt, whereas if all they think about is the stuff they can buy with debt, they are more likely to incur debt. Maybe if everyone had to take one of these courses before getting a credit card, it would lead some to change their mind and less people would get into trouble.

As always, I am so grateful to have Jean Braucher read and offer thoughtful comments on my research. As she notes, the paper is somewhat optimistic about financial education, largely reflecting the fact that a substantial portion of debtors were optimistic about its value. I want to caution that we did not and have not assessed whether the education actually DOES have value. That is, it may make no difference at all in helping people avoid further financial trouble, even though debtors thought that it would. The best way to measure the actual value of the education would be a controlled clinical trial, with large groups of debtors randomly assigned into two groups: given financial education and not given financial education. And then we'd have to follow those debtors for some period and reassess their financial circumstances. Having described the needed study, it's probably obvious why it hasn't been done yet. It would require a lot of money and a strong research team. But the new Bureau of Consumer Financial Protection has (or will have) both those things. The Bureau is to have a Research Unit and an Office of Financial Education and here is a great collaborative first study for them.

Not to be a dog in a manger (That's a lie. I'm the doggiest dog that ever clapped eyes on a manger.), but my purely anecdotal experience with several thousand evaluations over the years is that the overwhelming majority were the product of two drivers: "Let's get this over with quickly" and "Say something nice or don't say anything at all."

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