How effective are mandatory debtor education courses in bankruptcy?
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As part of the bankruptcy reforms Congress pushed through in 2005 came the requirement that all filers complete not one, but two debtor education courses. The intent of the first course – the pre-filing one – was to lay out alternatives to filing bankruptcy so that debtors know they have other options to consider. The post-filing course was intended to help debtors that chose to file for bankruptcy learn how to manage their money in the future.
A recent study out of the University of Denver Sturm College of Law examined outcomes in two different ways. First, the study considered whether either of the courses actually helped debtors in the way that Congress intended. Second, they questioned whether either of the courses changed consumer behavior about their finances for the better. Let's take a look at what the study found and what this means to you. If you're interested in reading the study for yourself, you can download it for free here.
The study worked with 58 Colorado bankruptcy filers and only four of these said they found the pre-filing counseling helpful. Other studies have shown that very few filers opt for anything other than bankruptcy once they take the pre-filing course. As for the post-filing debtor education course, many saw them as a hoop to jump through, not personalized enough or presenting only information they already knew. Some study participants even called the courses “a waste of time.”
Takeaways from this research...
Even if the courses are ultimately not helpful to filers, the fact is they are required by law. Second, as with so many things in life, you get out of it what you put in – meaning that if you view the courses as having nothing to offer you, that's likely the experience you'll have. Third, the courses address bankruptcy filers as those that got into a debt mess because they were mismanaging their money and this is a disconnect from the reality of who really files bankruptcy.
While those without college degrees still make up the majority of bankruptcy filers, the number of degree holders that file Chapter 7 or 13 has climbed rapidly in the last few years. This is also true of high income earners that file for bankruptcy protection – it's also on the rise. In fact, it's not that most bankruptcy filers don't know how to manage their money, but rather that they are put in an untenable position where they simply don't have enough money to manage.
Faulty assumptions about bankruptcy filers...
Far too often, our lawmakers push through legislation that is ill-informed. There are thousands of bills presented each year on complex and diverse subject matters and our legislators don't have the time to fully understand what they're voting on (even if they wanted to). The legislation that mandated debtor education courses was intended to curb abuse of the bankruptcy system when many believe there was far less abuse occurring than the legislation would have you believe.
Most people that file bankruptcy end up doing so because of a major life event that negatively impacts their finances. For some, this may be a serious accident or catastrophic illness of the wage earner or their spouse or dependent. For others, it's a prolonged bout of unemployment. For still others, it's a shift in the economy that collapses their small business. These are people that were likely managing their finances just fine until an unexpected occurrence cost them their income or savings (or both).
Getting the fresh start you deserve from bankruptcy...
Even if you don't feel like you gleaned anything useful from the debtor education courses, to get the best results from your bankruptcy, adopting smart financial strategies is critical. A recent Gallup poll shows that 66% of Americans do not have a budget for their personal finances. We've talked here before about the importance of budgets in keeping your finances under control. You may know that you need a budget and understand the tenets of responsible money management and just not be using the knowledge you have in your back pocket.
This is understandable when you don't have enough money coming in and are scrambling to make ends meet. But once Chapter 7 clears out your unsecured debts or you opt for Chapter 13 and get on a repayment plan, it's imperative that you put what you know about money management to work for you so you don't end up in financial trouble again.
If you're deep in debt and want to find out more about how bankruptcy can help you get back on track, contact the North Carolina bankruptcy experts at the law offices of John T Orcutt for a free consultation.