Abstract:
When Congress amended the Bankruptcy Code in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), it mandated that individual consumer debtors undergo two debtor education courses, one as a condition precedent to filing for bankruptcy relief, and a second for later receiving a discharge of indebtedness. As for the pre-filing credit counseling course, Congressional aim was to have prospective debtors understand the potential alternatives to filing for bankruptcy relief with the goal of having some percentage of debtors settle their debt obligations outside of the bankruptcy system. Regarding the post-filing financial management course, Congress wanted debtors who utilized the bankruptcy system to learn effective financial management techniques to employ after the closing of their bankruptcy cases. Ever since the prospect of debtor education as a formal component of the bankruptcy process was raised decades ago, bankruptcy scholars and commentators have offered empirical studies and opinions about the efficacy of such a program. To date, however, no empirical study has appeared in the legal literature regarding the effectiveness of the mandated debtor education courses imposed by BAPCPA. Accordingly, the purpose of this Article is to report the findings of my own qualitative study of Chapter 7 debtors regarding their experiences with, and impressions of, the current debtor education courses required by the Bankruptcy Code. My study sought to address two research questions. First, do either, or both, of these mandated debtor education courses help individuals in the way Congress intended? And second, do consumer debtors change their financial behaviors as a result of participating in either, or both, of these mandated debtor education courses? As will be reported herein, the vast majority of the participants interviewed for this study did not find the courses to be of any help to them in their financial lives, and for most, any positive changes made to their financial well-being following bankruptcy was not attributed to anything learned from the education courses themselves, but from the experience of going through the bankruptcy process, never again wanting to find themselves in such a desperate and vulnerable place in life. Nevertheless, a small population of debtors interviewed for this study, less than seven percent, did find the debtor education courses helpful in the ways Congress intended.
Commentary:
This study focused on the impact of credit counseling and debtor education courses for Chapter 7 Debtors only. The utility of credit counseling is even lower for debtors that need to file Chapter 13, as such filing are far more frequently driven by foreclosures, repossessions, garnishments, tax claims, and other obligations or threats for which the alternative, viz. debt settlement or management plans (always of questionable utility in many situations), would provide neither timely relief or protection.
The debtor education courses offered by many Chapter 13 Trustees, particularly in the Eastern and Middle Districts of North Carolina (but sadly and strangely not in the Western District, with its greater ambivalence to Chapter 13) are likely of far greater value. Not only are such course generally free for the debtors, but they are longer and have the added value of providing information about what is required, allowed, and forbidden during the course of a 3-5 years Chapter 13 plan. Research on the efficacy and value of these courses would provide an interesting counterpoint this paper.
Further, although unmentioned in this article, it should be clear that these credit counseling courses are, in essence, a supplemental filing fee, but one that that is not paid to the judiciary, but instead to private and often for-profit entities. This raises the costs of bankruptcy and diverts funds that would otherwise be available for the courts and trustees. A more vociferous response from such corners, together with pro-consumer voices and academic research such as this, could end this waste of money and time.
For a copy of the article, please see:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423538
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