Academic journal article Journal of Legal, Ethical and Regulatory Issues

Force or Free Will? A Comparative Analysis of Mandatory versus Voluntary Debtor Education

Academic journal article Journal of Legal, Ethical and Regulatory Issues

Force or Free Will? A Comparative Analysis of Mandatory versus Voluntary Debtor Education

Article excerpt


A recent study measured the effectiveness of financial education classes attended by individuals who had filed for Chapter 13 Bankruptcy. The results indicate that debtor education is successful in improving financial management skills and behaviors. In addition to testing the overall efficacy of such classes, this project compared responses for mandatory versus voluntary class attendance. Further analyses compared debtors' ages, household income, educational levels, reasons for filing bankruptcy, propensity to save money, use of new credit during bankruptcy, and perceptions of individual responsibility for their financial situation. The results should be of interest to bankruptcy trustees, judges, and attorneys as well as legislators, educators, and debt counselors.


This study is the latest in a series of efforts (Stokes 1995; Stokes & Polansky, 1999) to measure the effectiveness of education in modifying detrimental financial habits and behaviors of a proven high risk group--debtors in bankruptcy. Through education programs sponsored by a number of Federal Bankruptcy Trustees, debtors who file under Chapter 13 of the Bankruptcy Code are offered classes in money management. While the classes vary in some respects, they all promote understanding of basic economic principles, financial management techniques, and include material related to psychology of money management. The classes are brief, usually from two to four hours in length, and debtors normally attend one class during the course of the bankruptcy process.

A central premise of the classes is that few individuals learn how to manage money in an organized and effective manner. The result is that many people in this country are financially illiterate. If financial illiteracy is a major cause of bankruptcies, then financial education could diminish the number of filings, pave the way out for those already in bankruptcies, and enable debtors to avoid money problems in the future.

The Offices of the Chapter 13 Trustees in Dallas and Ft. Worth, Texas, sponsored a study of individuals attending the classes in that area. The questionnaire was based on instruments used in two previous studies, and also included additional items requested by these trustees.


For those unfamiliar with the U.S. Bankruptcy system, Chapter 13 provides for reorganization of debts for individuals and sole proprietorships with a regular source of income and limited amounts of debt. Individuals in Chapter 13 submit a plan providing for payment of all or a portion of their creditors on a deferred basis, usually over a period of three to five years. A court-appointed trustee administers the process to assure proper handling of the debtors' estates (U. S. Bankruptcy Code).

The bankruptcy laws provide inducement to both debtors and creditors to resolve debt problems in an organized and fair manner. During the course of the proceedings, the debtors are allowed to maintain possession of their property and are protected from continued collection efforts by creditors. After completing their repayment plans, debtors receive a "fresh start" virtually free of debt. Creditors also benefit from the process. They receive a fair share of the debtors' disposable income relative to other creditors, and the process is more efficient than individual litigations. The trustee processes payments from the debtors to the creditors and generally oversees any concern the creditor may have in the debtors' case. In successful Chapter 13 cases, creditors receive a greater amount of debt repayment than under "straight" Chapter 7 liquidations.

Critics of the bankruptcy system allege that it encourages irresponsibility, providing a haven for individuals who want to avoid their financial obligations. These critics have been more vocal of late, in light of the continued increase in the rate of bankruptcy filings and the parallel rise in consumer debt (American Bankruptcy Institute, 2001; Koretz, 2001). …

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