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5/1/2008
by Dr. Angela Lyons-University of Illinois at Urbana-Champaign Tommye White and Shawn Howard-Money Management International
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The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed by Congress in 2005. The legislation includes two educational provisions. First, debtors are now required to complete an approved credit counseling session prior to filing for bankruptcy. After filing for bankruptcy, they are then required to complete an approved financial education course before they are able to discharge their debts. These requirements were adopted to ensure that consumers were able to make an informed choice about bankruptcy, its alternatives, and consequences. They were also included to provide debtors with the financial skills necessary to better manage their money and avoid future financial problems.
In 2006, Money Management International, Inc. (MMI) launched a multi-phase research study to measure the educational value of its bankruptcy counseling and education services. The study was motivated by the following research questions:
- Does bankruptcy counseling and education increase debtors’ level of financial knowledge?
- Does bankruptcy counseling and education assist debtors in improving their financial behaviors?
- Do debtors benefit from both the counseling and education requirements? Or, does one requirement appear to be more effective than the other?
To provide insight into these questions, MMI collected quantitative and qualitative data from clients who participated in its telephone bankruptcy counseling and education courses. Between July and December 2006, pre- and post-tests were administered to measure changes in clients’ financial knowledge, current and intended behaviors, and overall satisfaction with the counseling and education. Clients were also asked about their current financial situation, the reasons for their financial problems, and the steps or actions they were planning to take to better manage and improve their finances. Overall, the findings show that debtors’ financial knowledge and behavioral awareness and intentions improved as a result of both the counseling and education.
Specifically, debtors who participated in MMI’s counseling session and education course experienced statistically significant gains in financial knowledge. On average, counseling participants scored 74.9% on the pre-test and 86.0% on the post-test for a net gain in knowledge of +11.1%. Education participants, on average, scored 80.3% on the pre-test and 85.5% on the post-test for a net gain in knowledge of +5.1%. The overall percentage increases in knowledge were 14.8% for counseling and 6.5% for education. Larger gains in knowledge for the education course were found for questions related to credit use and debt management, while smaller gains were found for questions related to more basic concepts such as financial goal setting and budgeting.
With regards to financial behavior, debtors were asked to report how often they engaged in a series of positive financial practices such as setting financial goals, saving money regularly, tracking income and expenses, paying bills on time, reviewing bills for accuracy, comparison shopping, organizing financial records, and establishing good credit. On average, there was little change in debtors’ behavior pre- and post-counseling and pre- and post-education. This was not surprising since one would not have expected to see large and immediate changes in behavior following a 60- to 90-minute counseling session or a two-hour debtor education course. Debtors needed time to actually implement and change their behaviors. Some were also constrained by their financial situation and unable to implement behaviors because they had not yet discharged their debts and were still under court supervision.
With this said, debtors were found to be in the stages of preparation and action throughout the entire counseling and education process, which indicates that they were at a “teachable moment” where they were open to financial information and ready and willing to change their financial behaviors. In addition, debtors were closer to implementing financial behaviors that were not as dependent on their financial situation or the bankruptcy process.
Two additional findings emerged when changes in specific behaviors were examined, not at the sample means, but across individual stages of behavior. First, some debtors reported on the pre-test that they were “not planning to do” the financial behaviors. However, as a result of the counseling and education they became aware of their behaviors and realized they needed to change. On the post-test, these debtors reported that they were “planning to do” the behaviors. Other debtors indicated on the pre-test that they “had [already] been doing” the financial behaviors. However, on the post-test, they reported that they were now “planning to do” the behaviors. Supporting evidence revealed that some of these debtors were simply indicating their commitment to continuing their behaviors after the counseling and education. Other debtors thought they had been doing the behaviors beforehand, but realized by the end of the counseling and education that they actually had not been doing them.
Qualitative data further revealed that the counseling and education likely had a positive impact on debtors’ knowledge and behavioral awareness and intentions. Debtors’ responses to open-ended questions reflected the key financial concepts covered during the counseling and education. Also, debtors were very specific about the steps and actions they were planning to take to improve their financial situation, indicating their readiness and willingness to change their behaviors.
In the end, over 94.0% of debtors felt that their overall ability to manage their finances had improved as a result of the counseling. Over 98.0% of debtors felt that their overall ability to manage their finances had improved as a result of the education. The evidence suggests that debtors’ financial literacy improved as a result of the counseling. Moreover, even after participating in the counseling, debtors’ financial literacy continued to improve as a result of the education.
These findings have important legislative and educational implications. From a legislative perspective, the results provide insight into whether the counseling and education requirements are serving their intended purpose of helping debtors to make an informed choice about their bankruptcy options. From an educational perspective, the results shed light on whether these requirements are helping to improve debtors’ overall financial literacy.
This study suggests that the current course requirements be revisited and that a more specialized and contextualized curriculum be considered for bankrupt families that helps them to better recover from bankruptcy and achieve long-term financial security. This could be a “fresh start” program that helps them better deal with their most immediate financial concerns such as rebuilding credit, checking and monitoring credit reports and credit scores, comparing credit offers, using credit more wisely, avoiding predatory lending practices, and being financially prepared for the unexpected. There could also be an opportunity to provide more tailored types of education to debtors based on their specific financial situation and their main reasons for filing for bankruptcy. Finally, opportunities may exist to follow-up with debtors after the bankruptcy process and provide them with additional financial counseling or “financial coaching.” Specifically, counselors and educators could assist debtors in actually changing their behaviors by helping them to set personalized financial goals and providing them regular motivation and stimuli for achieving those goals.
To download a complete copy of the report and learn more about the impact of bankruptcy counseling and education on debtors’ financial well-being, click on "View Attachment" below. To learn more about Money Management International, visit MoneyManagement.org.
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