Required Federal Bankruptcy Education Provides Little Benefit

In 2005, the federal government revamped the process of filing for personal bankruptcy, instituting many new requirements of bankruptcy filers. One such requirement is an education component, which requires would-be bankruptcy filers to participate in a two-hour financial education class aimed at helping people better manage their finances and avoid re-filing in the future. According to a recent study, these federally mandated courses are largely unhelpful for the majority of bankruptcy filers in Georgia and across the country.

The study, which was conducted by University of Iowa law professor Katherine Porter, questioned 2,000 people who filed for bankruptcy in February and March of 2007, finding that just one-third of the study’s respondents believed that the courses would have helped them to avoid future bankruptcy. The largest problem with the courses, Porter said, was that they are completely standardized. Because they are not tailored in any way to the filer’s age, level of education, or reason for filing bankruptcy, they are largely ineffective.

Because it was created in 2005, before the housing and economic crisis that has caused the continuing rise in bankruptcy and foreclosure, the education assumes that most people who file for bankruptcy do so because they have been financially irresponsible. However, Porter says, as the recession drags on, people are more likely to file for bankruptcy for reasons beyond their control. “Teaching people to make different financial decisions can reduce the incidence of financial distress only if the distress is caused by a person’s financial knowledge,” she said.

The filer’s age and education level greatly affects the benefit provided to him by the course. For example, most respondents who stated that they found the course beneficial were under the age of 25 or over the age of 65. In addition, while just 22 percent of college graduates stated that the course would help them avoid future bankruptcy, 36 percent of respondents without a four-year degree considered the information beneficial.

Porter said that age and education level can often be synonymous with the level of knowledge about personal finance, and can have a significant effect on the effectiveness of the course. “It appears that more awareness of their financial plight leads people to perceive less benefit from the financial education course,” she said.

Source: Iowa Independent, “Study: Education for those filing bankruptcy offers small financial benefit”, Lynda Waddington, 8 November 2010