Available at SSRN: https://ssrn.com/abstract=4752879
Abstract:
This paper is a chapter in a comparative volume examining social state, legal, and socio-political influences on debt counseling, in particular the challenges for the practice of counseling that arise from prevailing social and socio-political ideas about debt, help for those in debt, and over-indebtedness. It analyzes the US system of debt counseling as representative of the "market model" (in contrast with the "liability model" in Germany and Austria, the "grace model" in Sweden, and the "restrictions model" in England). This chapter reveals the unique trajectory of development of debt/credit counseling in the US, which arose not as a branch of social work or public support, but as a market-driven adjunct to small-loan lending, and it expanded as a market-driven response to a rise in personal bankruptcy. The “market model” thus quite aptly characterizes both credit counseling and personal bankruptcy in the US. Both represent efforts to keep the wheels of commerce turning in the face of market challenges, with a minimum of intervention, regulation, or funding by public government. The U.S. challenges arising in both credit counseling and personal bankruptcy also demonstrate the limitations and risks of leaving such complex and sensitive matters to private market resolution.
Commentary:
This short article, which, as shown by its secret file name of "Schulden, Schuldenberatung und Sozialstaat", was written for a German comparative law course, provides a brief twinned history in the U.S. of not just bankruptcy but also the debt settlement/credit counseling. And while I have been refreshing my high school German by using the Babbel app, I doubt it is sufficient to read this book auf Deutsche, so further summaries from that work of other countries' bankruptcy systems should not be anticipated until that has been translated.
The reminders of how debt settlement and credit counseling are wholly captured by the financial services industry, putting the interests of credit cards above those of their putative clients, would be useful for the U.S. Trustee Program (and Bankruptcy Administrators) in evaluating what disclosures, requirements and restrictions should be put on providers of pre-bankruptcy credit counseling briefing. (Which certainly should be brief.)
As bemoaned in Footnote 1, financial education classes for young people would be far more effective than credit counseling for people already in deep financial distress. More states seem to be offering and even requiring high school students to take such a course, with North Carolina instituting that in 2019. See N.C.G.S. § 115C‑81.65.
While the article does a remarkably good job of describing in lay person's terms the application of the Means Test, describing it as "often somewhat awkward, to put it mildly", as seems to be de rigueur in academic literature on consumer bankruptcy, it describes Chapter 13 as a less preferable option to Chapter 7 because in it "debtors promise to relinquish three to five years’ of their future income beyond that which is necessary to support their reasonable domestic support needs".
This ignores both that if a debtor has disposable income they are not eligible for Chapter 7 and that the disposable income test in Chapter 13 is more generous, as it allows greater deductions for expenses, including retirement savings, than in Chapter 7.
The assertion that "consistently around 90 percent of all debtors preferring chapter 7 relief pass this median-or-below income test", while probably accurate is statistical cherry-picking, since it does not recognize that those debtors (having competent consumer bankruptcy attorneys) that fail the Chapter 7 Means Test generally do not file Chapter 7, either filing Chapter 13 or not filing bankruptcy at all. The ~10% who file Chapter 7 and do not receive a discharge because they fail the Means Test almost certainly were borderline cases, had improved circumstances or did not have a lawyer.
To read a copy of the transcript, please see:
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