If you are feeling financially fatigued and fearful about losing your home, spend a few hours in a bankruptcy-required class, or one like it -- even if you aren't filing for bankruptcy.
The simple step could save your assets.
As foreclosures and other mortgage defaults rise unabated, bankruptcies -- nearly half of which are mortgage related -- have been on the decline since the most significant overhaul of the bankruptcy laws since 1978 took effect more than a year and a half ago -- about the same time the housing boom began to go bust.
Since October 2005, the new law made it more difficult to get through bankruptcy court and that certainly has reduced the number of bankruptcies.
Also, those who rushed to file under the old law skewed statistics by pushing the number of bankruptcies higher than they may have been during the final period before the new law took effect.
But other provisions of the new law are specifically designed to reduce the number of bankruptcies before they reach court and to prevent consumers from returning to bankruptcy court later.
There's some indication the provisions are working.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) contains provisions that require that all individual bankruptcy candidates undergo credit counseling in an individual or group session within six months (180 days) before filing for bankruptcy relief. Another provision says bankrupt debtors must complete a more involved course in personal financial management before debts can be discharged.
The courses are only available through U.S. Bankruptcy Court-approved credit counseling agencies or course providers.
In the first study to measure the new law's effectiveness, the National Foundation for Credit Counseling's (NFCC) "Consumer Counseling and Education Under BAPCPA," found that fewer than four percent of consumers who turned to NFCC agencies for mandated pre-filing counseling actually opted to enroll in voluntary debt management programs (DMPs) instead of filing for bankruptcy.
However, related testing revealed consumers improved their financial knowledge by 10 to 40 percent.
They accomplished that task after only a few hours of education in bankruptcy-mandated counseling. Most consumers also said they plan to apply their new knowledge by setting budgets and making more prudent decisions about spending in the future.
Chances are, they've also seen the inside of a bankruptcy court for the last time and have a better chance of holding onto a home.
Based on more than a half million bankruptcy-related counseling sessions, conducted by 107 NFCC agencies, 11 months after the new law took effect, the NFCC study found:
- Consumers filing for bankruptcy were typically "upside-down" financially. Average unsecured debt exceeded average annual income by more than $12,000.
- Mortgage delinquency was prevalent for consumers filing for bankruptcy. Among those agencies reporting, 42 percent indicated that between 26 and 100 percent of their pre-filing clients were delinquent with their mortgages. This is higher than reported for non-bankruptcy counseling clients.
- The No. 1 reason consumers intended to file for bankruptcy was "poor money management/excessive spending."
While bankruptcy-mandated counseling can be conducted over the phone, Internet or in person in a few hours, the lessons are not the kind of no-brainer courses some college students take to pad elective requirements.
Bankruptcy law requires:
- Credit counseling agencies must provide approximately 90 minutes of counseling that includes a budget analysis and credit counseling designed to consider all the alternatives -- not just bankruptcy -- to resolve a client's credit problems. That includes an analysis of the client's current financial condition, a discussion of the factors that caused the condition and information on how the client can develop a plan to respond to future problems without defaulting on debts.
- Before debts are discharged, more exhaustive information in a minimum two-hour financial management course is necessary. In the study, the classes lasted more than 2.5 hours, on average. The information is broken down into four categories: budget development, money management, the wise use of credit and consumer information. Each category comes with minimum curriculum requirements.
Those requirements include:
- Budget Development -- Consumers learn how to set short- and long-term financial goals and to develop skills necessary to achieve those goals. Lessons include calculating gross versus net monthly income and identifying monthly expenses as fixed, variable, or periodic.
- Money Management -- Information includes the importance of keeping adequate financial records; developing decision-making skills to distinguish between wants and needs; comparison shopping; maintaining adequate insurance coverage and saving for emergencies, for periodic payments and for financial goals.
- Wise Use of Credit -- The session should provide information on the types, sources and costs of a variety of credit and loans; identifying debt-trouble warning signs; appropriate use of credit; alternatives to credit and how to check one's credit report.
- Consumer Information -- The final session provides clients with resources for consumer assistance; information on related consumer protection laws and regulations and protection against consumer fraud.
Time and again, studies prove consumers properly schooled in financial education retain home ownership longer and with fewer financial problems, they have higher credit scores and generally live a less financially-stressed life style.
The sooner in the consumer's financial life the education begins, the better.
