Nov. 3, 2010
UI study finds fault with bankruptcy law’s mandatory finance education course
A new study by University of Iowa law professor and bankruptcy expert Katherine Porter finds that a financial education course required of everyone who files for bankruptcy has serious flaws and provides little help to many of the people who must take it.
The education program was part of the changes made to federal bankruptcy law in 2005 and must be completed before the court discharges a person’s debts. The course is two hours long and covers the general topics of budget development, money management, wise use of credit and consumer information.
Porter said the course is required on the expectation that it will help people better manage their finances and avoid re-filing for bankruptcy in the future. She said all petitioners take a course with a standardized curriculum, and there is no segmentation for people based on things like education, income or reason for filing for bankruptcy.
Porter’s study includes the responses of approximately 2,000 people who filed for bankruptcy in February and March in 2007 and completed a survey assessing the education program. While 72 percent of those surveyed said they found the program useful, only 33 percent said it would have helped them avoid bankruptcy.
Porter said one weakness of the educational program is that it assumes most people file for bankruptcy because of some kind of financial irresponsibility on their part. She said it does not acknowledge that many people have to file for bankruptcy for reasons beyond their control, such as catastrophic health care expenses or job loss, and have nothing to do with financial mismanagement.
“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,” Porter said. “One of our respondents filed for bankruptcy after she was burdened by medical expenses following a heart attack, and she said no amount of financial education would have helped her not have a heart attack.”
The study found the program’s one-size-fits-all approach is also limiting. Most of the survey respondents who found the program useful were younger than age 25 or older than age 65, tended to have lower levels of education and little familiarity with finances. Porter said those with higher levels of education and more familiarity with finances found the program not only unhelpful but “condescending and insulting.”
For instance, 36 percent of those without a four-year college degree believe they could have avoided bankruptcy with the information they learned in the program, but only 22 percent of college graduates shared that view.
“It appears that more awareness of their financial plight leads people to perceive less benefit from the financial education course,” Porter said.
The data also showed a sharp split based on race. While 28 percent of whites said the course might have helped them avoid bankruptcy, 49 percent of minorities said the course would have made a difference.
Porter also points out that the government provides little oversight of the educational program and does not use any standardized assessment tools measure its effectiveness.
Porter’s study, “Debtors’ Assessments of Bankruptcy Financial Education,” was co-authored by Deborah Thorne, associate professor of sociology and anthropology at Ohio University. It will appear as a chapter in the book “Financial Knowledge and Decisions,” edited by Douglas Lamdin, and be published in 2011 by Springer.
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