Bankruptcy counseling doesn't always make sense
By Holden Lewis • Bankrate.com

She wanted to declare bankruptcy because she had big feet.

Steve Rhode, co-founder of Myvesta.org, a counseling service for people in financial crisis, tells the story:

A woman told Myvesta counselors that she couldn't make her debt payments and needed to declare bankruptcy. After talking with her for a while, counselors realized that the woman's problem wasn't her debt; it was her income. She didn't earn as much as she should, considering her education and experience.

Turned out that her problem was her big feet. Or rather, her attitude about her feet.

"The only reason she hadn't gone out and got a better-paying job is that she was so self-conscious about the size of her feet," Rhode says. "She wouldn't go out on interviews."

Bankruptcy wouldn't have solved her problem. Neither would have an increasingly popular option: a court-mandated money-management course.

Financial traffic school
For years, bankruptcy trustees in a few cities (mostly in Texas) have required debtors to take classes in personal finance. You know how you can wipe your speeding ticket off your record if you take a daylong driving class? The bankruptcy courses are based on the same faith in education.

No one knows for sure whether money-management courses for bankrupt debtors work, or even how to measure effectiveness. That hasn't stopped Congress, which is poised to prescribe personal finance courses for people who file bankruptcy. The proposal is included in the bankruptcy reform legislation that is working its way through Congress.

The folks who teach the courses believe they help.

"Anytime anyone learns anything, it's an excellent thing," says Pamela Stokes, who teaches a personal finance course to bankrupt debtors in Corpus Christi, Texas, and is an associate professor of business law at that city's branch of Texas A&M University.

Stokes published a study in 1995 in which she surveyed bankrupt people who had taken personal finance courses in Corpus Christi within the previous 18 months. "The study showed that they were using the material, that they did improve their financial situation," she says.

She acknowledges that studies such as that one, in which people assess themselves, are not considered as reliable as more-rigorous research. "But if they think they're doing better, by gosh, I tend to believe them."

Other teachers, including Jane Jolley, agree.

Breaking poor patterns
Jolley wishes the public schools would teach children how to set financial goals, spend wisely, balance a checkbook and understand credit. Meantime, her job is to teach those things to bankrupt people in Fort Worth, Texas.

"You've got adults here who have established patterns, and it's very difficult to break those patterns," she says. "They've been through a crisis, and it's possible that the motivation may be here now to address these things."

In Fort Worth, people must attend a personal-finance seminar before they can start a Chapter 13 repayment plan.

(There are two main chapters of personal bankruptcy. In Chapter 7 bankruptcy, debts are wiped out and the filer gets a fresh start. In Chapter 13, the debtor repays some or all of the debts under a three- to five-year plan supervised by a trustee. Generally, people file Chapter 13 so they can keep their homes and some self-respect.)

The Fort Worth classes are held on the days when Chapter 13 debtors meet their creditors in a formal hearing. A typical class has 80 to 100 people. Teachers try to keep the tone positive.

Jolley asks students to recall attitudes about money from childhood. She talks about the differences among rent-to-own contracts, credit cards, mortgages, car loans, leases. She encourages them to pay credit card balances in full each month if possible.

Jolley is joined by a Chapter 13 trustee who explains the bankruptcy process, an instructor from Consumer Credit Counseling Service who talks about budgeting, an Internal Revenue Service employee who discusses how bankruptcy affects taxes, and someone from the trustee's office who explains a credit rehabilitation program. Everything takes about four hours.

Defining success
Clients tend to evaluate the courses favorably. "This was better than I thought it would be," one evaluation reads. "My wife and I are leaving here with a sense of hope instead of dread."

Joan Truman, who runs Fort Worth's credit rehabilitation program, says it's hard to define effectiveness. If a debtor drops the bankruptcy petition and pays all his or her debts, was the course effective? If a debtor completes the three- to five-year repayment plan (nationwide, fewer than half complete a repayment plan), is that a sign of success?

Stokes is studying bankrupt debtors who took classes in Texas to find if they saved money and took on new credit. She is asking if the course helped them and how.

That's more than the bankruptcy reform legislation calls for. Positive evaluations from debtors would be sufficient for a course to be deemed effective. The bills don't require anyone to find out if the financial education courses prevent people from sliding back into financial ruin.

Lawmakers certainly want to do something about bankruptcy. After a two-year slide, bankruptcies are up again.

Psychological healing
No one likes to question the value of education, but critics are willing to take on that unpopular task.

Jean Braucher is a University of Arizona law professor who is studying whether debtors who take the courses are more likely to complete their repayment plans. She says some debtors are driven more by psychological issues rather than financial ignorance. She draws an analogy between dining and spending: Just as people sometimes eat unhealthy foods when they know better, some people spend unwisely when they know better.

Rhode, of Myvesta.org, says consumers would gain more benefit by having one-on-one guidance than by taking crowded personal finance courses.

He offers the example of the woman who felt so self-conscious about her feet. Myvesta counselors arranged for her to get psychological counseling, and she got a better job. You might even say that she landed on her feet.

A money-management course wouldn't have helped her because the root of her problem was psychological, not fiscal.

On the other hand (or foot), the federal government isn't about to pay psychologists to counsel debtors, so money-management teachers have to do their best to step their clients in the right direction. Stokes, who teaches classes in Corpus Christi, says it's important to talk about "how one's ideas about what's important in life affects how one deals with money."

"Even if they pick up one hint out of a three-hour class ... man, it's worth the time," she says.

-- Posted: Aug. 16, 2001