The 2005 revisions to the Bankruptcy Code, known as BAPCPA, include provisions that require debtors to complete two separate credit counseling courses before being permitted to obtain a discharge.
These credit counseling provisions have been controversial. Many bankruptcy attorneys and even some judges have questioned whether the courses provide any real value.
However, a new study released last week indicates that these financial education courses may, after all, provide value to consumers.
Congress included these two debtor education requirements in BAPCPA because of Congress’s belief that debtors could access bankruptcy too easily and that bankruptcy had become the financial remedy of first resort. By adding these education requirements Congress sought (1) to encourage potential debtors to consider alternatives to bankruptcy before filing; and (2) to discourage debtors from filing bankruptcy in the future.
Since BAPCPA passed Congress and became law most bankruptcy professionals have viewed these education requirements as useless and possibly even harmful.
Nonetheless, there is some new evidence to the contrary. The results of part one of a multiphase research study, just released in May 2010, indicate and that these courses do appear to provide measurable benefits.
The study was performed by Dr. Angela C. Lyons, Associate Professor, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, in association with Money Management International, Inc. (MMI), one of the largest providers of bankruptcy credit counseling courses in the U.S.
The results of phase one indicate that the financial education courses may in fact benefit debtors after all.
Some of the key findings include:
- Significant objective improvement in overall financial literacy after the counseling. On average, debtors scored 77.1 percent correct on the pre-test and 85.9 percent correct on the post-test for an increase in knowledge of 11.4 percent.
- Significant subjective improvement in overall financial literacy after counseling. Over 97 percent of debtors felt more knowledgeable about the bankruptcy process and the options available to deal with their current financial problems. More than 91 percent felt that their overall ability to manage their finances had improved.
- Debtor satisfaction with the counseling experience. Over 99 percent found the counseling course helpful and about 97 percent admitted that they were more likely to seek counseling again if faced with financial problems in the future. Almost all debtors seemed to appreciate the educational value of the counseling session and did not feel that the requirement had been a burden or an administrative obstacle.
The jury is still out on BAPCPA’s credit counseling requirements. Notwithstanding the results of this study, many bankruptcy practitioners “in the trenches” have found these credit counseling courses to be a substantial burden on the system. But even so, the results of this study are significant, and further phases of the study bear watching.
Photo courtesy of Morning Glory.
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