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Evaluating Mandatory Financial Education in Bankruptcy

posted by Katie Porter

In 2005, Congress amended bankruptcy law to require individual debtors with primarily consumer debts to complete an "instructional course on personal financial management" to be eligible to receive a discharge of their debts. Adding financial education as a bankruptcy requirement divided the bankruptcy community, even debtor advocates, judges, academics, and others who almost uniformly did not like the 2005 amendments. Part of the mixed sentiment about the financial education may be that it is hard to dislike something as innocuous-sounding as education (although Professor Lauren Willis makes a good case against it in this article). And there were certainly bigger fish to fry in opposing the 2005 laws. Still, many complained that this was one more example of creditors getting Congress to lard on duties for debtors, driving up the cost and work of obtaining bankruptcy relief and setting up debtors to have their cases dismissed if they tripped up by failing to complete the educational course.

Dr. Deborah Thorne and I have a new study that looks at how debtors themselves feel about the mandatory financial education course. It is a chapter in this book, Consumer Knowledge and Financial Decisions (ed. Douglas Lamdin, Springer, 2012) and available to read here. In the 2007 Consumer Bankruptcy Project, we asked debtors whether they believed that the information from the financial education class 1)would what they learned in the financial education class have helped them avoid bankruptcy originally, and 2) would help them avoid financial trouble in the future. While only 33% thought a financial instruction course similar to the one required of bankruptcy debtors could have helped them avoid filing, 72% thought it would help them avoid future financial trouble. As we report in detail in the chapter, some demographic groups were much more positive about the value of financial education than others.

About half (48.7%) of minority persons who filed bankruptcy, for example, thought the course would have helped them avoid bankruptcy; for whites, the response was 27.6%, a little more than half. Similarly, there significant differences in the perceived value of financial education--both to have helped prevent their bankruptcy and to help them keep out of future financial trouble. Those without a college degree, those aged under 25 years or 65 years or over, and those who less familiar with their household finances believed the course had more value. Note that the point is not that the course actually would have or will help debtors; the measure here is debtor's perception of value, which I think is well worth evaluating in a system that is designed to rehabilitate debtors.

Thorne and I suggest that the U.S. Trustee program take a little initiative and go beyond just approving providers of financial education based on vague curriculum standards. Instead, it could  develop tailored curricula for different demographic groups. Doing so would make the most of the opportunity to teach debtors and perhaps help provide value to the segment of debtors who did not find the course useful. This isn't a new idea; indeed, more than three years ago John Rao wrote on Credit Slips  about the need to go away from a general financial education curricula toward one that reflected the consequences of having filed bankruptcy (including differences in experiences depending on the chapter of bankruptcy filed). And in a prior study, Thorne and I noted that bankruptcy education could warn debtors about things like the heavy solicitations after bankruptcy with subprime borrowing offers (reported in detail in this study). But the U.S. Trustee curriculum standards are pretty vague and sound like something from a junior high home economics class: budget development, money management, wise use of credit (my favorite lecture topic to a group of people who just filed bankruptcy!), and consumer information. Mandatory financial education is here, and I suspect in my lifetime it will not disappear from the bankruptcy system--even if a radical overhaul is made. Why not make the best of the law with sophisticated, tailored curricula? Debtors are generally making the best of the mandate; the system should meet these financial education optimists more than halfway with strong curricula.


Some Chapter 13 trustees do their own debtor education programs. That would appear to be a more targeted approach.

It would be interesting to know how those programs compare, in terms of debtor satisfaction, with the Chapter 7 programs which are almost all the private programs approved by the U.S. Trustee program.

One thing it is easy to say about debtor education - it isn't the complete waste of time and money that pre-filing internet hogwash foisted off as a meaningful "report" on the debtor's finances.

"Instead, it could develop tailored curricula for different demographic groups".

I like that concept! At least here big oil and gas dominate with the development of the "Eagle Ford Shale". I have always maintained that oil filed workers were the most likely to get into trouble and need specific strategies for coping with their unique financial situations.

ie. Roughnecks: No high school diploma necessary but they can work their way up to making up to $20-$40 per hour sometimes more.

The Problem: Once the price per barrel of oil dips, they are laid off almost immediately! What are they then qualified to do besides oil field work? Fast food, landscape etc.. all with $20-$40 per hour debt! Most try to wait it out. The ones with families are put through enormous amounts of stress "On the job" and it doubles when they don't work.

YA! Bankruptcy counseling is a total waist of time and money!! For the debtors who struggle to sometimes come up with filing fees, the $50 bucks Green Path fka consumer credit counseling charges is big! Why do we have non-profits in charge of the "Keys" to consumer bankruptcies? If your Biz, you don't need "permission" in essence... Was it meant to provide counseling to debtors that should be given to them by their attorneys? Like their attorneys won't give it to them or were unqualified to give? Makes no sense!

There are now approved providers that offer completion certificates for pre filing at $10.00 and even one at $5.00. Online delivery systems.

I wrote about what a friend recently experienced last week (he used an online product for $35.00). Reading this reminded me to publish it:

Providing budgeting and money management education is a great first step towards making sure that people who go bankrupt learn their lesson, understand the reasons that led up to their bankruptcy, and don't repeat the cycle, but fine-tuning this education to meet the needs of various groups is a great idea.

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